Graduation is an exciting time but also a busy one. Between searching for a new job, navigating your student loans, and moving on from college life, your credit score is probably the last thing on your mind. Your credit stays with you throughout your life, though, so it’s important to get a handle on it now. It can affect everything from your ability to get a car loan to the cost of your monthly bills.
“Maintaining a healthy credit score is important because it can impact your overall financial footprint,” Farnoosh Torabi, personal finance expert and Chase Slate financial education partner, tells mental_floss. “A higher credit score can also boost your chances of qualifying for a loan with a lower interest rate on credit cards, mortgages, and car loans. It can also help reduce the rates you pay on insurance, cable, and utilities.”
Torabi adds that in some cases, prospective employers can also request a copy of your report. Landlords also regularly run a credit check when you fill out a rental application; if your credit is concerning, it might affect your approval. In other words, poor credit can be a huge headache.
A common misconception among recent grads (and many people) is that the best way to avoid credit card debt is to not have a credit card. While this might be true, it's also a bad idea. Using a credit card wisely is the first—and easiest—way to start building good credit. So, get yourself a credit card, then follow these five simple steps to improve your score in the short-term and ensure healthy credit in the long run.
1. DRAFT A BUDGET.
Your credit score is basically a gauge of your financial health. And good financial health starts with a budget. It may be an obvious step, but it’s a crucial one that many grads neglect.
“College graduates often forget to budget, which can mean accumulating unnecessary credit card debt or depleting savings before the semester’s over,” Torabi says. “It’s important to set a budget and create a list of your financial priorities so you can meet any necessary payments first, like rent and student loan payments.”
Make sure you have enough every month to cover those essential expenses, then focus on budgeting your wants (your discretionary expenses). Of course, there’s more that goes into drafting a budget, but Torabi’s point is that healthy credit starts with a solid plan.
2. SET UP AUTO-PAY.
“Like any other loan, the best way to ensure that your student loan is having a positive impact on your credit score is to pay the monthly bill on time every time,” Torabi says. “It’s actually a great way to establish healthy credit at a young age.”
Paying your bills in full and on time will obviously help you establish good credit, but it’s easier said than done. Torabi suggests facilitating this goal with automatic payments. Budget how much you can afford to pay on your loan or credit card balance every month, then set up an automatic payment so your debt is prioritized.
Bonus: Many student loan services offer an interest rate discount if you set up automatic payments. Check with yours to see if you can score a rate cut.
3. PAY MORE THAN THE MINIMUM.
“The second most important factor that goes into your overall score is credit utilization, which accounts for 30 percent [of your overall FICO score],” says Torabi. “Credit utilization is the balance you’re carrying on all of your credit cards compared to the credit limit on all of those cards. The lower your utilization, the higher your credit score will likely be.”
Torabi says this is why it’s important to pay more than just your minimum balance every month. Not only will you get out of debt sooner, your score should also improve, because you’re using less of your available credit. Whenever possible, throw windfalls like tax refunds or work bonuses at your debt.
4. CHECK YOUR REPORT.
You should also know what your credit looks like in the first place. This way, you can fix any errors that might be dragging down your score, but more importantly, you’ll be aware of any issues you need to work on.
You're entitled to a free copy of your credit report every year, and AnnualCreditReport.com has long been the standard for obtaining a detailed copy of your report. The report itself is relatively easy to read. All of your credit lines and debts are separated as “accounts in good standing” or “potentially negative items,” making it easy to pinpoint the specific accounts you need to improve.
Look for mistakes like paid accounts that haven’t been reported as such or accounts you never opened. If there’s an error, you’ll have to write a letter to the credit reporting company (Experian, TransUnion, or Equifax) explaining the mistake and disputing the negative item on your report.
5. CONTACT THE LENDER BEFORE MISSING A PAYMENT.
Student loans are a big burden for many grads, but there are relief options available. Missing a payment will definitely ding your score, and worse, going into default can really make it difficult to repair your credit.
Torabi suggests talking to your student loan servicer to work out a solution. “Know that if you anticipate having difficulty paying down your student loans, it’s best to contact your lender—before missing any payments—to learn about alternative payment solutions,” she says. “The last thing you want is to fall behind on your student loans. Late payment fees can add up very quickly!”
Many credit card companies offer hardship payment plans for customers, too. These programs aren’t advertised, but if you’re struggling, they can save you from massive late fees and compounded debt from high interest rates—both of which can destroy your score. When calling the issuer about these programs, you should approach the topic carefully, though. ClearPoint Credit Counseling explains:
You don’t want to give away too much information about your situation right away. Think of your initial call as an inquiry rather than a done deal ... creditors may be able to make modifications to your account based on the conversation you have. For instance, if you express difficulty to pay, your credit limit could be lowered or access to your account could be limited. It’s also important that you don’t promise more than you can pay.
It shouldn’t be surprising that most of these credit steps are smart financial moves in general. Your credit health is a measure of your financial health, after all, and maintaining solid money habits will help ensure your good score stays intact long-term.