The day you graduate college is supposed to be one of the best days of your life. All the blood, sweat and tears poured into your education finally becomes worth it the moment you walk across the ceremonial stage, shake the Dean's hand and step off into the real world. However, stepping into the real world also means stepping into real responsibilities such as properly managing your finances.
There is a high probability that as a recent college graduate, or soon-to-be graduate, that you have little to zero credit history. Aside from student loans and a possible car payment, there is nothing on your credit report that lets potential employers, landlords, or other lenders know how well you prioritize your obligations. One of the easiest, simplest ways to start building and maintaining your credit history is by opening and using at least one credit card.
If you are a recent or soon-to-be college graduate and are ready to start building a strong credit history, then take into consideration these three tips when using credit cards:
Secured credit cards are friend, not foe
There is a common misconception that a secured credit card is only for folks with poor credit and that these cards are not "real credit cards". This could not be further from the truth. Secured credit cards are excellent starter cards for young adults who need to either build or repair their credit.
Typically these cards offer a refundable cash deposit and extend you a line of credit equivalent to the deposit you make. For example, if you provide the credit card issuer with a $300 deposit, your credit limit is $300. This reduces the risk to an issuer should you not be able to make on-time monthly payments, and encourages you to practice smart budgeting. By keeping the security deposit and credit limit lower on a secured credit card you are more likely to be in a position to pay the card's balance in full and therefore raise your credit score by demonstrating responsible spending.
Before you even consider applying for a credit card account or accepting "pre-approved" offers you receive in the mail, it is critical you know your starting point. You need to inform yourself of your current credit score, what accounts are being reported to the credit agencies (this is also how you do your part to prevent identity theft), and how much debt you have in total.
There are a lot of free online credit check resources out there, some more comprehensive than others.
You can obtain your credit report at no cost to you each year through the website, www.annualcreditreport.com, and we have several educational resources on our site to help you along the way.
Understand when to spend
"This card is for emergencies only!"
You have probably heard your parents tell you this dozens of times if they have ever loaned you their credit card. One of the biggest struggles recent college graduates face when they start using credit cards is deciding when to use them.
That is not to say you should only use your credit card in the event of an emergency, but there are definitely certain purchases that will actually cost you more in the long run by putting them on your card. For instance, let us say cash is really tight until your next paycheck but you would give anything for a new iPhone, so you charge the $850 device to your credit card. Then, since you do not have enough money in your bank account to pay off your credit card bill in full, you are charged interest. The $850 iPhone may end up costing you hundreds of dollars in interest.
Even small purchases can be detrimental such as a $5 latte a few times a week, a couple of drinks with your friends each Friday, and some delivery lunches… these $10 and $20 purchases can add up to $100's of dollars in a month. If you do not have enough money to pay the purchases off in full, your $5 latte quickly becomes $6 or $7 and a night out with friends goes from $50 to $100. Then, the following month, if you repeat these same habits, not only are you adding new purchases you cannot afford, you are still paying interest on the old purchases. This is how misuse of a credit card can cause you to enter a downward spiral into bad credit.
For recent college graduates, managing your credit card accounts comes down to responsible, resourceful and realistic spending. Whenever a decision needs to be made regarding credit cards, ask yourself, what is the responsible choice? Is this a realistic choice? Am I being resourceful?