The good news is you recently graduated from college and landed your first job. Unfortunately, your credit history is scant, and this can be as challenging a financial hurdle as having poor credit—because the absence of credit makes building positive credit difficult. Yet building credit after college is an essential step toward a secure financial future.
“Building credit goes beyond your student loans,” says Kevin Gallegos, credit expert and vice president of Phoenix operations with Freedom Financial Network. “Now that you’re officially in the real world, you’ll realize building and maintaining a healthy credit score is essential for landlords, insurance companies, employers and utility companies to approve your applications.”
Luckily, you can use your new employment status to your credit-building advantage.
Figure out your current credit circumstances
Before you do anything it’s essential to first get the full picture of your current credit standing.
“You’ve got to know your starting point,” says Gallegos. “Many young adults already have credit profiles and don’t even realize it. Start by finding out if you do.”
Obtain your free credit reports from AnnualCreditReport.com, which will show you your standing with the three major credit-reporting agencies—Equifax, Experian and TransUnion.
When looking at your credit report, make sure your personal identifying information is accurate, check for inquiries you weren’t aware of, and confirm that any past and present accounts are accurate.
If your report shows inaccuracies—Gallegos says incorrect addresses are not uncommon for young adults who may have moved a few times—correct them immediately.
“The best, fastest and most effective way is to follow the directions on each agency’s website,” says Gallegos. “Under terms of the Fair Credit Reporting Act, the credit bureaus must investigate any disputed items and remove them from the credit report if they cannot be verified.”
Use income from your new job to get your first credit card
You’re no longer a poor college student. You’re a young professional with actual, verifiable income. Use this to your advantage by obtaining a credit card with a low spending limit and maybe a rewards package.
“You’re not going to qualify for high-roller rewards cards at this point, so if you’re going to get a card out of college I always recommend ones with cash back,” says Mike Sullivan, a consultant with Take Charge America, a national nonprofit credit counseling and student loan counseling agency. “This way you’re not only building credit but also getting something in return.”
For instance, the Capital One Quicksilver card has no annual fee and offers 1.5 percent cash back on all purchases and usually comes with a 0 percent intro period.
“As a general rule for new graduates, annual fees are a waste,” says Sullivan. “This isn’t to say all cards with fees are bad, but they’re not necessary when you’re just starting out.”
For a card that rewards good behavior consider the Journey Student Rewards Card from Capital One. You don’t have to be a student to apply, and the card offers not only 1 percent cash back on all purchases but 1.25 percent cash back during months you pay your bill on time.
“I like encouraging new credit users to look for a card that rewards good financial practices,” says Gallegos. “Managing your budget and making payments on time will be critical to building good credit, so why not find a card that incentivizes that?”
If you have absolutely no credit history (or you’ve made a few minor credit mistakes during your college years), consider the Discover it Secured Card, which requires a $200 deposit but has no annual fee and gives 2 percent back on restaurant and gas purchases (on up to $1,000 in combined purchases each quarter) and 1 percent back on everything else.
“My best advice for graduates is to stick with one of the simpler credit card options for your first card,” says Brandon Yahn, founder and CEO of StudentLoansGuy.com. “Don’t apply for the top rewards card at first. These require a good credit history, and since you’re just starting to build your credit you can graduate to these later.”
Use your new card wisely and avoid carrying a balance
If your primary reason for obtaining a credit card is to build credit, then plan to use it. This is how your credit report will begin to reflect an active history of responsible borrowing. But this too needs to be done strategically.
“Go out and use that card for something you have to buy anyway—like gas or food—and then pay it off immediately,” says Sullivan. “Don’t carry a balance and don’t charge a lot. Just use the card enough to establish a pattern of financial responsibility.”
According to certified financial planner John Barnes, too many credit newbies harbor the myth that they need to carry a balance in order to build credit, when the fact is credit is built best by making small purchases on your card and paying off the whole balance when your statement comes in.
“Credit agencies like to see predictability and normalcy. If graduates pay their bills on time and every time, they will see improvement in their credit scores within a few months,” says Barnes. “The combination of timely and frequent bill paying and low debt-to-credit utilization will enable the graduate to build credit much faster.”
Don’t rush to increase your credit limit, even if you can afford to
So you’ve got a steady job and you’ve been reliably paying off your credit card balance. After a few months it may be tempting to ask for a credit limit increase—but not so fast.
“I’m of the opinion that graduates need to demonstrate positive financial behaviors for at least a year before asking their current card issuer for an increased limit,” says Barnes. “Even if the graduate is making $100,000 annually but struggling to pay his bill, this will have a damaging affect on his credit score. That’s why the focus should be on frequent bill paying, not getting more credit.”
What’s more, says Sullivan, young consumers already tend to charge more than they should to their credit cards. Increasing the credit limit so early in the game will make that temptation greater.
“Give yourself some time managing a $1,000 or $2,000 credit limit just to make sure you don’t get into trouble. Test yourself and make sure you can do this,” says Sullivan. “This can be hard because most lenders actually want to give you a higher limit. But resist the temptation for at least a year.”
Avoid lifestyle inflation
After landing your first job and getting approved for your first credit card you may feel tempted to treat yourself with a spending spree. After all, you spent years living on a tight budget, so you’ve earned the right to splurge, right?
“The trick to building good credit, staying out of debt and paving the way to a secure financial future is keeping costs as low as possible,” says Sullivan. “So you’ve got to rein in the desire to upgrade everything you purchase.”