Hello Graduate –
The next few months will be both exhilarating and painful. You’ll miss your friends, the ease of living in a college bubble and eventually look back nostalgically on some of those all-nighters. But instead of staying in a phase of arrested development, you’ll be able to become truly independent, establish a career, perhaps move to a new city and build a foundation for the rest of your life. Part of the foundation of life revolves around handling your finances.
Post-graduation you’ll be entering what is obnoxiously referred to as “the real world,” assuming you don’t seek protection in your parents’ basement. Finding the basic necessity of shelter will be high on your priority list. It doesn’t matter if you plan to rent or buy, your credit history and score will dictate your future.
If you spent college being financially responsible with behaviors like using a credit card and always paying off the balance or perhaps you even starting to pay off your student loans, then your credit score will probably be good (680 – 749) to excellent (750+).
Quick credit score recap
Credit scores help lenders assess your “risk factor” – like evaluating the consequences of going out drinking the night before a final. The lower your credit score, the more likely they are to think you’ll default on a loan, make late payments or jet off to a foreign country and assume a new identity. A high score (or one above 680) indicates trustworthiness.
Fair Issac and Company (or FICO) – who owns the definition and scores credit – use five factors to create your credit score:
Payment history (35%): do you make payments on time? Missed payments can crush your credit score quickly
Amounts owed (30%): the more debt you have, the lower your score. But even more important than the total amount you owe, is the amount you owe in relation to your total credit limit – which is called utilization. If you max out every card you have, you will get punished
Length of credit history (15%): the longer you’ve had credit, the better
New credit (10%): this looks at how many new accounts you have opened, and many times you have applied for credit.
Types of credit used (10%): the more types of credit you have, the better. So, someone who has successfully managed a car loan, a mortgage and a credit card would score better than someone who just managed a credit card successfully.
Why a strong credit score is important
When you want to rent your first place, your future landlord will most likely run your credit report and score. If you’re looking to buy, then your report and score will absolutely be run to determine your mortgage. The credit report shows your financial history including loans and credit cards as well as if you ever defaulted, missed or made a late payment. The credit score helps the landlord easily determine if you would be a good tenant. They’re probably looking for a 680 or higher.
The same goes for anyone who might be giving you a loan, like a car salesman. The higher your score the more negotiating power you bring to the table. If you’re resting in the high 700s then you’ll be able to get lower (aka better) interest rates than your peers in the low 600s or below.
Build your credit score
If you’re starting out with a low or non-existent credit score, don’t worry. We have resources to help you establish and/or build your credit score. We’ve outlined six simple steps below
- Get a line of credit – opening a credit card is the simplest way to begin establishing credit history.
- Keep your utilization rate low – utilization is the amount of your credit limit you spend each month. Aim to keep your utilization below 30 percent.
- Pay in full, and on time, each month – the easiest way to prove you’re responsible is to only charge what you can afford.
- Avoid credit card debt – by only charging what you can pay off, you’ll easily avoid the debt trap of a credit card.
- Your score will improve and better card options will come – once your score gets above 680, you’ll start getting offers from top-tier credit card companies.
- Protect your score – check your credit reports at least once a year for accuracy and signs of fraud.
For more details, visit our building your credit section.