Establishing a decent credit history is very important for us. Qualifying for auto loans, renting apartments, mortgage loans, and even employment depends on your credit history. So it’ll be a tough call for you in future if you complete the graduation without a decent credit history.
Ironically, the students have much tougher time in building their credit than their classmates who already carrying credit cards. Building credit after graduation become much tougher for newly grad students as credit card companies assume that your parents will no longer pay off your bills. Fortunately, the newly grads can consider few ways that can be helpful to build up their credit.
Here are those important ways to consider:
1. You must understand how credit works
You can open a couple of credit cards and opt out a small loan to improve your credit score, but you must make each payment on time.
It’s very surprising that how credit works for us. For example, having no credit cards will make your profile a risk to the credit scoring system. It is because without having any credit activity the scoring system can’t assess your creditworthiness. Without assessing your creditworthiness, the lenders will not approve your application.
You must remember, that a lender will also consider other aspects besides your credit score while determining your creditworthiness. These may include collections, bankruptcies, charge-offs, and even judgments against you. Even if your score is relatively less, if you have more positive items on your credit report, you may be considered ‘credit-worthy’ to your future creditors. So, try to add positive items on your credit report.
Know more: The 5 biggest financial factors that affect your credit
2. You must pay before due date each month
Making every single payment on time impacts on your credit score more than anything. Your payment history considers 35% of your credit score, more than any other factor.
To make sure you don’t forget
a. Set up automatic bill payments directly from your bank account. Put all of your major payments like power bills, mortgage or rent payments, cable and telephone bills, auto loan payments, etc. on auto-pay.
b. Communicate with your each creditor and set up auto-payments every month if possible. You can do this by logging into the company’s website, or you can call them directly.
Your credit card balance can vary each month due to the credit card bills. If your bank account balance is getting lower due to unpredictable payments each month, you can set up reminders on selective dates when you need to pay off credit card bills. This way you can backup your bank balance by filling it up with due dates.
3. Use credit cards wisely
Credit cards are seductive but also necessary.
You must take enough time to set up a balanced spending habit while using a credit card.
A few tips:
a. Don’t use the card just because you got it for free. You must limit the number of cards you have. Don’t opt for a card without knowing its perks and expenses.
b. Stay in the driver’s seat. Always research and shop before opting a credit card or loan. Don’t sign the agreement without comparing features, interest rates, and annual fees.
c. Good habits always give you freedom. If you pay off credit card bills fully every month, you can concentrate on other beneficial features like rewards and fees instead of focusing on rates.
4. Go for credit mix
You must use a mix of credit types for a healthy credit score.
There are two kinds of credit:
a. Open-end or revolving lines of credit: For example, credit cards, (on which you can make minimum monthly payment or pay full outstanding balance ), borrowing against a credit limit.
b. Closed-end or installment loans: Auto loans and mortgages are considered as installment loans. The main features of this kind of loans are fixed monthly payment made within a fixed date.
Your credit mix shows the lender how efficiently you’re handling different type of credit lines. Although it accounts for just 10% of your credit score, having a good credit mix along with a good payment history will build your FICO Score.
5. Understand how much credit you should use
The credit mix helps your score to grow, but the account balance amount also matters. It accounts for 30% of your credit score. To be on a safer side, opt for less than 30% of the amount you are allowed to borrow.
Use less than 30% of your credit limit on each credit card.
If your credit limit is $10000, borrow less than $3000.
Why so? It is because using only a small portion of your credit limit is a decent way to pump up your score.
6. Whittle your student loans
Don’t let your student loan stop you from building a good credit score. Your score will rise as your loan balances diminish. So, start paying off the student loan to reduce the principal amount. It’ll show that you’re using less of your available credit.
7. Begin with a small credit line
To establish your credit, here’s what you can do initially:
a. Go for a credit union card – Opt for a card from a credit union. It might get easier to have your first card from there rather than from a bank.
b. Use a secured card – Secured cards are initially best for learning how to use a credit card. You need to put a deposit, and that’ll be your credit limit. Though it’s your money, but you mustn’t use more than 30% of your limit. Your aim is to build credit, so use it wisely.
c. Check whether your payment behavior is reported – Some secured cards report your payment record to the big three credit reporting agencies (Experian, Equifax and TransUnion), but others do not. Opt for those secured cards that report it at least to these agencies.
d. Shop carefully – Secured cards can be costly, so don’t forget to research, compare and shop carefully before signing the deal.
e. Look for a card with a grace period – The grace period is a time frame during which you can pay off your dues without paying interest. So, don’t overlook the grace period while choosing a card.
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