How to Build Your Credit History after College
If you're a recent college grad, you probably don't have much credit history established. But as you're making the transition from college to adult life, now would be a good time to start focusing on building your credit. According to Experian, your credit history can affect everything from your employment to your housing. If you're applying for a credit card, car loan or mortgage, your credit history plays a key role in whether or not lenders will approve you, hence the reason why building your credit is so important.
How does credit work?
Most likely, your credit wasn't top of mind while you were in college, so knowing how credit works may be foreign territory for you. Here's a quick rundown of the basics:
- Your credit report A credit report is a document containing your personal information, credit account history, credit inquiries and public records, which may include prior bankruptcies and accounts that have been sent to collections. Information found in your credit report may be used to calculate your credit score, which is a numeric value that informs future lenders about your creditworthiness. This information is reported by creditors to the three major credit bureaus —” Equifax, Experian and TransUnion. Consumers can receive one free credit report check every 12 months from each of the three bureaus.
- Your credit score A credit score is a numeric value based on your credit history (number of open accounts, total amount of debt and repayment history), and helps lenders including banks, credit unions and finance companies determine your creditworthiness or how likely you are to pay back your debt. You can almost think of it as your GPA for credit. While there are many credit scoring models, your FICO® score is the one that is most commonly used by lenders to help them decide whether or not they should offer you credit. FICO scores generally range from 300 (bad credit) to 850 (excellent credit). In general, the higher your credit score, the more likely you are to be approved for financing.
- Your payment history This is a record of how timely you are with making payments on your open credit accounts and can have a significant impact on your credit score. According to FICO, your payment history accounts for 35 percent of your credit score. Since a positive payment history begets a positive credit history, it's important that you make on-time payments every month.
- Your credit history This is how long you've been managing your credit accounts (i.e. rent, mortgage, credit cards, car loans, etc.) and is a major part of what lenders consider when deciding to approve you for credit. Generally, the more positive credit history you have, the more positive it is for your credit score.
How do I build my credit history after college?
- Start paying your student loans. If you have student loans, making timely payments every month can help establish a positive credit history.
- Apply for a secured credit card. A secured credit card (which is backed by a cash deposit) is intended to help you establish credit so that you may qualify for unsecured credit cards (that don't require the borrower to make a deposit) and make other large purchases on credit.
- Pay your bills on time, every time. Making on-time payments is a great way to improve your credit and build good credit history. You can set up automatic payments and/or electronic reminders to help you stay on track with monthly payments.
- Keep your credit utilization low. Your credit utilization ratio is how much of your total available credit you use. Most experts recommend using no more than 30 percent of available credit on any card. So, for example, if you have one credit card with a limit of $5,000, your recommended credit utilization ratio would be $1,500. Also, since the amount of credit you use in relation to your total credit limit accounts for 30 percent of your FICO score, it's best to keep it low. A general rule of thumb is the lower your credit utilization ratio, the higher your credit score.
- Apply for subprime financing. Subprime financing is credit available to people who may have otherwise been turned down by traditional lenders or finance companies due to having bad credit or no credit. So, if you're a recent grad with no credit history established and are in the market to purchase a vehicle, you could qualify for subprime auto financing through a car dealer enrolled on the Credit Acceptance program. And, since we report to the three major credit bureaus, you can build your credit history with on-time car payments. Simply fill out the form on our website and get connected with a car dealer enrolled in our program that can help you start your credit approval today!