Building credit while hunting for a job, wrestling student loans and figuring out post-college life might seem like a tall order. But, just like the triumphant hat toss, it’s an important rite of passage for young adults.
“If you run the numbers, a good credit score will get you the best interest rate on loans you need in the future,” says Martin Dasko, founder of Studenomics.com. “As unsexy as it sounds to work on your credit, that credit score one day can save you thousands of dollars on a car loan or mortgage.”
The good news: Even a single credit card (assuming you use it well) can help you cultivate good credit.
“It’s the fastest and easiest way,” Dasko says. “You can put your cellphone bill and your car insurance payment on the card. Pay on time and repeat that every month, every year, the rest of your life.”
Below are three situations you might find yourself in after graduation – and your credit strategy for each scenario.
1. You’re starting from scratch with no credit history
Leaving college without a speck of credit history because you’ve never had a loan or a credit card? Your goal is to get someone, either a lender or someone with good credit, to give you a chance.
If you have a good relationship with your parents and they have good credit, consider asking if they’ll add you as an authorized user on one of their cards, suggests Michael Staten, director for the Take Charge America Institute at the University of Arizona. Although the account owner (whichever parent owns the card) will be fully responsible for charges made, the account and its payment history will show up on your formerly empty credit reports.
“If you have no credit, that gets you established,” Staten says. “All of a sudden you have a line that’s going to get reported.”
Or, ask a family member with good credit to co-sign a card with you. In this case, you and your co-signer will be held equally responsible for charges. Having a co-signer might sway a lender that wouldn’t be comfortable extending credit to you alone – and, as with an authorized-user arrangement, the card account would appear on your reports.
No family with good credit to turn to? Try a secured card, Staten suggests.
“With the secured-card route, you don’t need anybody else,” he says.
With this type of card, you deposit money with the bank to secure your credit line. That lessens the lender’s risk, and the card’s payment history shows up on your credit reports.
Whichever option you choose, it will clear the road ahead, Staten says.
“Once you have a credit account of almost any sort, acquiring accounts is much easier,” he says.
2. You have no job – and piles of student loans
Not having a job after you get your degree is frightening, and card issuers agree: They don’t want to lend you more (via a credit line) than you can pay back. If your income is zero, you can probably guess how much of a credit line they’ll give you.
But unemployed recent grads still might have a need for credit cards.
“They’re still faced with a need for a credit history and a flexible payment tool, which a credit card offers,” Staten says.
Staten recommends recent grads with no (or low) income pick one of the three approaches above (authorized-user arrangement, co-signed card or secured card) to bridge the gap until they land a job.
If potential issuers will turn you away for having no job, will they run for the hills once they pull your credit and see your student loan balances? Not necessarily, Staten says.
“Some of it will depend on the issuer’s risk appetite, and they vary,” Staten says. “But the big issuers recognize that, for that age group, student loans are part of the game.”
In fact, just having student loans on your credit reports means you’ve cleared the first hurdle of approval (having a credit history). If you’ve made on-time payments on those student loans, all the better.
“You’ve got that track record and that’s all positive,” Staten says. “It might as well be an auto loan with a positive payment history.”
The issuer might still give you a low limit – but that won’t prevent you from climbing the credit ladder says credit expert Linda Ferrari. The key is to keep the amount of credit you’re using below 30 percent of your available credit.
“If you have a $500 limit and you maintain a balance below $150, you will receive the same credit score rating as someone with a $30,000 limit and a $9,000 balance,” Ferrari says.
3. You’ve built some history and feel you deserve some credit
Perhaps you’re beginning post-grad life with an established credit history, thanks to a student credit card, a co-signed card or authorized-user arrangement, or student loans.
In that case, issuers are more likely to give you better terms, assuming there’s a positive payment history associated with those accounts. However, that doesn’t necessarily mean you should apply for a bunch of new cards, Staten says. As you move through life, you’ll find good reasons to acquire more credit naturally: You need a car loan, you switch financial institutions and acquire a new credit card, or you get a good targeted offer from an issuer.
“My general prescription is let it happen over time,” Staten says.
As you collect accounts over time, Ferrari recommends a mix of two to three major credit cards and a car loan as “a perfect mix of credit for a young adult.”
As for your faithful (but low-limit) student card? Don’t automatically dump it. Student cards contribute to your credit scores just as much as non-student cards, Staten says. Plus, your issuer might offer you better terms (such as a higher limit, or an upgrade to one of its mainstream products) to keep your business.
“I would always ask the current creditor first,” Staten says. “Just explain to them what you need, and see what they’ll do.”
An issuer might even upgrade you automatically if you’ve treated your student card well, Dasko says. And if it won’t? There are plenty of options out there for those who have proven they can handle credit well – including cards that offer rewards and benefits like travel insurance and extended warranty coverage.
4. You’re afraid you’ll mess up
Chances are you made some mistakes in college – both of the academic and social variety. So can you really trust yourself with a piece of plastic that can so easily become an accomplice to bad decisions?
What-was-I-thinking charges aren’t the end of the world, as long as you pay the balance off quickly, Dasko says.
“Stuff happens,” Dasko says. “Do your best and maybe cut back on an expense. You suck it up, and you pay it off. It’s going to happen. It’s life. We all make mistakes.”