There are many ways to build your credit, whether you’re working full time, freelancing or traveling
Congratulations! You’ve earned your college degree.
Now comes the hard work of building your credit.
Establishing a strong credit history after you graduate from college can be tricky, especially if you have little on which to build. If you have a student loan account in good standing or have your own credit card with no missed payments, you’re off to a great start.
There are numerous ways to build your credit, whether you start from scratch or with a brief history of loan or card payments. Your best strategy can depend a lot on your post-graduation plans — whether you aim to get a full-time job, a string of freelance gigs or travel the world for a year.
First steps in building your credit after college graduation
- Check your credit score and pull your credit report. This applies only if you have used credit cards or installment loans, such as student or car loans, in the past. FICO credit score ranges are as follows: poor (579 or lower), fair (580-669), good (670-739), very good (740-799) and exceptional (800 or higher). The higher your credit score, the better your chances of getting approved for a credit card with favorable terms. You can get your credit score and a copy of your credit report for free at Bankrate.com.
- Review your credit report for errors and phony accounts. Errors and fraudulent accounts in your credit report can prevent you from getting approved for credit cards and loans. File a dispute with the major credit bureaus – Equifax, Experian and TransUnion – if you find mistakes or bogus accounts in your credit report.
- Become an authorized user or get a co-signer. Authorized users can use the credit extended to the cardholder but do not hold legal responsibility to pay the bill. And the account will be added to your credit report, which will help you build a credit history. You could also get a co-signer for your credit card, but that person would be legally responsible for making payments on your card if you happen to default.
- Apply for a credit card. Pick the best card based on your credit quality. If you have a low score or no credit, you may have to start out with a secured card. A medium range credit score could qualify you for no-annual-fee, cash back and rewards credit cards. Applying for several cards at once can be risky because you could shave some points off your credit score and/or give prospective lenders the impression you’re overly dependent on credit. It’s best to apply for one credit card that matches your needs best.
- Make all payments on time. A missed credit card or loan payment will significantly damage your credit score. Missing a rent or utility payment may not affect your score unless your renter or utility provider turns it over to a collection agency.
- Refer to the “FICO 5.” Your credit score depends on five key FICO credit scoring factors. Use them as a guide for managing your credit.
Victor Miltiades, a full-time public relations professional in Boston, graduated from college in 2015 and already has a credit score above 800. His father added him as an authorized user to his credit card when Miltiades was younger and instilled in him the importance of paying the balance off on time every month. It allowed Miltiades to qualify and get approved for a card on his own just after college.
“I do pretty much all my spending on my credit card,” Miltiades said. “I didn’t open one until I had some money in my account and could spend it responsibly.”
How your credit score can impact your post-grad life
Your post-graduate income scenario could look completely different if you’re in your first job as an aerospace engineer compared to a first job as a teacher, and the amount of credit you apply for and use should definitely depend on your income.
The amount of credit you build and your credit score could have an impact on many different areas of your life, including:
- Your future interest rates
- Credit card and loan applications
- Getting an apartment
- Security deposits on utilities
- Signing up for a cell phone plan
- Getting a job
- How high your insurance premiums are
- The ease or difficulty you have in starting your own business
- Ease or difficulty in purchasing a car
Choosing the best credit-building strategy can depend a lot on your plans after graduation. Here are the best ways to build credit, based on different post-graduation scenarios.
If you are working full-time …
Earning a steady income can put you in the best position to establish an excellent credit score, but that depends on how well you manage future credit. If you’re starting a new job right out of school, it’s important to give yourself a few months to settle in before planning major expenses or applying for credit cards. After all, there are lots of different types of expenses you have to iron out, such as how much you pay for groceries or gas each month, not to mention your student loan payments.
“The thing to keep in mind is that everybody’s going to start on a probationary period,” said Michaela Harper, director of community education at the Credit Advisors Foundation. “Just because you got that job, there’s no guarantee that 12 months from now you’ll still have it.”
Harper stressed the importance of first building an emergency savings fund after you graduate. This can provide you with a financial cushion if that first job doesn’t work out. It also can put you in a better position to manage monthly expenses if you’re planning to buy a car, lease an apartment or even buy a small house or condo.
Once your job situation has stabilized and you’ve built up some savings, consider applying for a credit card – but only if you’re certain you can repay in full any charges you rack up each month. If you’re new to credit, your issuer may charge the highest APR allowable under the card’s terms. The interest rate could be in the high 20 percent range, which is why it’s so important to avoid interest charges by not charging more than you can pay off every month.
Checking your credit score will give you an idea of what type of card you can qualify for. If you start with a score of 669 or lower or no credit, a secured credit card – which requires a cash deposit that will be equal to your credit limit – may be your best option. It can enable you to get an unsecured card within a year if you make all your payments on time – the most important factor in your credit score. A “good” score (670-739) is likely to qualify you for an unsecured card, possibly with rewards, cash back and no annual fee.
If you’re applying for a credit card for the first time, you’ll likely be assigned a low credit limit. Avoid the temptation to spend too much of your available credit, as credit utilization accounts for 30 percent of your credit score. You can ask for a credit limit increase after 12 months or more of responsible use.
If you are getting paid by the gig …If you’re not ready to jump into full-time work, or you just can’t seem to find an opening, short-term freelance gigs can be a good option. Of course, smart budgeting and saving for an emergency are even more important if you’re not earning a steady paycheck. Working from gig to gig can set you up to miss credit card and loan payments if you’re not careful.
Harper’s advice to freelancers is to always save enough money to get by without a job for three to six months. This can help if you experience a prolonged gap between jobs, or if you get hired for a long-term project and you won’t get paid until it’s done. If you have a credit card, factor in how much your monthly payment would be if it were maxed out, and keep that amount in your savings, Harper says.
Freelance workers with a limited credit history who want to build credit but get paid irregularly may consider applying for a secured card at first. Or, if you have a decent score, you may want to avoid cards with annual fees, such as those typically associated with travel rewards cards, to keep costs down.
Consider your specific needs and what a credit card can offer you. For example, if you’re an Uber driver, you might consider getting gas rewards or if you’re an entrepreneur, consider a business credit card, which comes with additional benefits and perks if you’re trying to get your new business off the ground.
If you are seeing the world …
Many young people plan extended vacations or take temporary jobs abroad right after graduating from college. This can be a tough scenario under which to build credit, and you can be forgiven for not focusing on it while you’re away. For most of us, scaling the credit score ladder is not as exciting as climbing Mount Everest, seeing Paris at night or teaching Chinese grade schoolers how to speak your language.
Having access to credit can be a traveler’s lifesaver, however. Many credit cards offer emergency travel assistance, which can include anything from tracking down lost luggage and locating an English-speaking pharmacy to finding a lawyer if you get arrested.
Travel rewards cards can help you save on overseas flights, lodging and meals, putting more money in your pocket to pay other expenses. Keep in mind that most cards with travel perks require good or excellent credit and often come with higher annual fees, so this may not be an option if your credit history is thin.
Check the terms of any card you plan to apply for and avoid the ones that charge foreign transaction fees, as those fees can add up to 3 percent on non-U.S. purchases.
“When you’re traveling abroad, the transaction fees are what eats you up,” said Howard Dvorkin, Chairman of Debt.com.
Using a credit card abroad can also help you save on currency exchange rates. The rates set by card networks such as Visa, Mastercard and American Express are the same across the board, and they’re often 5 to 10 percent better than those offered by bank branches.
Perhaps the most important thing to remember if you’re away for a lengthy period is to stay on top of any bills that are coming due back home. It can take longer to send money to U.S. payees if you’re out of the country, particularly if you’re in a remote region with spotty cellphone or web service.
“When you’re traveling, you’ve got to make sure you don’t inadvertently screw up your credit,” Dvorkin said. “You may have the money, but because of the distance factor you may end up paying your bills late.”
If you are in grad school …
If you’re in graduate school and are curious about your credit card options, student credit cards are a great way to go. The reason? They offer perks like free Amazon Prime Student membership or extra rewards for good grades, which just aren’t available for those hitting that first job instead.
In graduate school, your credit card needs could run the gamut from textbooks to takeout (the time you don’t have as a first-year medical student is no joke) and even tuition. Note that some colleges and universities allow you to escape a convenience fee, but it’s important to ask, because a convenience fee could inflate the charges on your card. If you charge an extra 3 percent on an already hefty tuition fee, that makes a difference.
It’s also important to be sure that you have enough available credit to be able to put any tuition fees on your card.
Once you graduate, you might wonder what you should do with your student card. Unless there’s an annual fee, there’s no reason to cancel the card, but you might want to request a credit limit increase or upgrade your card.
How to “graduate” to excellent credit
Post-college credit building scenarios vary, but the formula for attaining a good credit score is always the same. No matter what your career plan is, it’s vitally important to pay credit card and loan balances on time and use as little available credit as possible, among other good habits. However, some methods might take a bit longer, and there are a few scenarios in which you might need to speedily increase your credit, particularly if you want to buy a house or need a car to get you to and from work. A few options to build credit quickly include:
- Obtain a secured credit card
- Ask a family member to add you as an authorized user on their card
- Have someone co-sign with you for a new credit card
Ultimately, it’s important to remember to use cards wisely and stick to a habit of saving more than you spend. No matter whether you have a job, are in graduate school or you’re doing a year of service after graduation, the path to excellent credit can be easy to follow.
See related: A two-step plan for building young credit, Don’t let credit card debt delay marriage