Congratulations! You’ve earned your college degree.
Now comes the hard work of building your credit.
Establishing a strong credit history after graduating 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 running start.
There are numerous ways to build your credit, whether starting from scratch or with a brief history of loan or card payments. Choosing the best strategy can depend a lot on your post-graduation plans — whether you aim to get a full-time job or a string of freelance gigs or travel the world for a year.
First steps in building your credit
- 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 CreditCards.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.
- 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, rewards and cash back cards.
- Refer to the “FICO 5.” Your credit score depends on five key factors in FICO’s traditional credit scoring model. Use them as a guide for managing your credit.
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.
“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 higher than 20 percent, which is why is 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.
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, founder of Consolidated Credit Counseling Services.
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.”
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.
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.”
If you use cards wisely and stick to a habit of saving more than you spend, the path to excellent credit is clear.