There are “Adulting” badges floating around social media declaring everything from “I woke up on time,” to “I did laundry today,” to “I kept my pet alive.”
But soon-to-be college grads have a particularly important Adulting badge to earn – figuring out the world of credit.
Because becoming a credit grown-up isn’t as simple as folding the laundry, we’ve broken the process down into several Adulting badges.
I checked my credit!
Pull your reports from all three major credit bureaus at AnnualCreditReport.com. These reports will show all credit accounts tied to your identity (including any cards you’re an authorized user on and any student loans that are reporting to the credit bureaus). They also give you a full picture of what creditors will see if you apply for a loan or a card.
“It gives you an idea of what you’re looking at – and what is the world looking at,” says Bill Pratt, assistant professor at Piedmont Virginia Community College and author of “The Graduate’s Guide to Life and Money.”
If you see any accounts that shouldn’t be there, you now have the chance to get them removed before they can ruin a loan application.
You don’t need to be that concerned about paying for your FICO scores at this point unless you’re planning a major loan application (you’re buying a house, for example), Pratt says. Free credit scores from services like Credit Karma, My.Creditcards.com and Credit Sesame, which approximate your real-deal FICO scores, will be enough for you to monitor your credit health.
“That gives you a ballpark idea, and that’s all you need right now,” Pratt says.
I separated my credit life from my parents’!
If a parent co-signed a card for you or added you as an authorized user before you started college, count yourself lucky. Assuming they kept the card in good standing, you should have a good credit score upon graduation without having done much work on your end.
“I think it’s amazing to have a parent jump-start your credit for you,” says Keola Harrington, financial counselor at non-profit credit counseling organization Clarifi.
You don’t necessarily have to cancel that card — and can keep it running in the background to continue building your credit. However, Pratty says, “the ultimate goal is to get off the dole.”
That means getting a card wholly in your own name. Having multiple accounts in good standing feeds your credit score and helps you establish good credit habits (such as paying the balance on time) independently.
“It’s like that first time you have to go to class and your parents aren’t there to wake you up,” Pratt says.
In addition to strengthening your credit, having your own card can help you at your first post-college job. Your employer may prefer to reimburse you for traveling expenses rather than give you a company card. If you don’t have your own card (and your parents don’t want you actually using the one they co-signed for you), that can leave you in an awkward position.
“I’ve seen recent graduates who have no credit, no money and they’re trying to rent a car,” Pratt says.
Your first card doesn’t have to be fancy, Pratt says. In fact, if you’re trying to build credit, focus on getting a card with no annual fee instead of one with fancy perks and rewards. Rewards cards encourage you to spend more, which can be dangerous if your income can’t support it. Plus, using too much of your available limit can tank your credit score.
“Just use a small portion of the limit,” Harrington says. “For people who are trying to build, I recommend never over-using the card.”
I planned ahead to meet a credit goal!
If a house or car loan is in your future, don’t wait until the week before you apply to boost your credit.
“Your credit score is like your GPA and your credit report is like your transcript,” Pratt says. “You can’t wait until the last semester of senior year to go from a 2.0 to a 3.5. It’s a long-term game.”
So get credit accounts in your name now. A card is a good place to begin, and Harrington recommends starting with the financial institution where you have a bank account.
“I’m big on building on those relationships because, when you are ready for that house or you need that car, the bank already knows your payment history,” Harrington says.
If you get turned down, don’t go on a card-application spree, as each inquiry dings your credit. A safer bet is a secured card, Harrington says. You’re more likely to get approved for this type of card, as you’ll put some of your own money down as collateral for the credit limit.
Next, increase your credit variety. FICO’s algorithm rewards those who can juggle a mixture of revolving credit (credit cards) and installment accounts (loans) in your credit profile because this mix makes you seem trustworthy to lenders.
So if you have a card already, consider adding an installment loan to the mix. Some credit unions offer special credit-building loans for those who need to shore up thin credit. Or get a small-dollar personal loan and pay it back quickly. In his personal finance classes, Pratt suggests getting a $500 personal loan, depositing the money and using it to pay the loan back over three months. You’ll pay some interest, but, in return, you’re nourishing your credit score with credit variety.
I was proactive with my bank!
Advocating for yourself, Pratt points out, is part of becoming an adult. But it can be intimidating to call your card issuer and ask for better terms or for lenience on a late fee.
“I don’t mean this in a negative way, but this is a generation that’s grown up on technology where you don’t normally have to pick up the phone or talk in person,” Pratt says.
However, negotiating a lower APR can save you a lot of money if you need to temporarily carry a balance. And issuers will often waive your first late fee if you call in advance and appeal to their goodwill, Pratt says.
I faced my student loans!
Student loans may be the most painful trial of credit adulthood – and falling behind can hurt your credit. So Harrington and Pratt both emphasize paying a visit to your school’s financial aid office to sort out the following:
- Who has your loans and what you owe: You can track down your federal loans in one central location, but finding all your private loans can be trickier.
- Re-payment/forgiveness/deferment/forbearance options available to you: These vary by your circumstances and career. If any of your loans are forgiven, you need to be careful about the tax consequences, Harrington emphasizes.
- Consolidation: It can bring simplicity but not always savings, Pratt notes.
Once you have a plan, draw up a budget you can stick to. This probably will include making sacrifices so you can throw as much extra money as you can toward shaving down your loan principal.
“Make a budget your best friend,” Harrington says.
If your parents took out a parent loan to help finance your education, be sure to hold a meeting with them.
“I’ve seen miscommunication between parent and child,” Pratt says. “The parents have taken out a parent loan, but they’re expecting the child to pay them back. Proactive communication is part of becoming an adult.”
I wasn’t afraid to ask for help!
Part of adulthood is knowing when to ask for help, whether it’s from your school’s financial aid office or a non-profit credit counseling organization (go here to find one). You might think of a credit-counseling organization as a place to go after you’ve spent years messing up your credit, but many offer programs and workshops for young people and recent grads.
“We have clients who come to us before they even touch a credit card,” Harrington says. “If you don’t know anything about credit, learn about it before you use it. When you start driving, you don’t just jump in the car and figure it out.”