You took your last exam, donned the cap and gown and have finally embarked on a new and exciting phase in your adult life. What will you need to know that you probably weren't taught in college?
There's a good chance you missed out on an important class that's rarely found in any college curriculum—Personal Credit 101. So, to help you get started on the right path, here are our top 5 tips to ensure your credit will be there for you when you need it most:
1.) Ignore the Credit Naysayers
Let's get one thing straight. Credit card "DEBT" is evil and toxic. If you remember anything from this article, remember that you should never carry a balance on your credit cards.
Having said that, don't allow the credit naysayers out there to fool you into believing credit cards are inherently evil and you should only make purchases in cash. When used wisely, credit cards can be a powerful tool to help simplify your personal finances, track spending and reap rewards all at the same time.
Besides, it's simply impossible to build a solid credit history if you only use cash. No credit history means no credit score, and that's not a situation you want to find yourself in when looking for a new home, car or even your next place of employment.
Consider getting a few no annual fee credit cards so you can start (or continue) establishing your credit history right away. If you're unable to get approved for a credit card due to a lack of credit history, try applying for a secured credit card that will report your payments to the major credit reporting agencies. The fees will be higher, but after making on-time payments for about a year, you should qualify for the switch to an unsecured credit card.
2.) Buddy Up with Your Credit Reports & Scores
It's time to get well acquainted with both your credit reports and credit scores. Check in on them often, and when you make financial decisions, always take a moment to step back and think about how your decision might indirectly affect your credit scores.
In addition, visit Annualcreditreport.com to pull a free credit report from each of the three major credit reporting agencies. You may wish to spread your free reports out through the year so you can check a new report every 3-4 months.
And when you're ready to check in on the status of your credit score, head over to myFICO to purchase your real FICO scores. Don't let the credit bureaus dupe you into buying a FAKO credit score that would otherwise never see the light of day. If you're going to pay for a score, make sure it's your FICO score.
3.) Keep Your Credit Utilization in Check
If you don't have a long history of credit, you may find that your credit card limits will start out rather low. This can unknowingly hurt you credit score if you don't pay close attention to your credit utilization ratio, which accounts for about a third of your credit score and measures how much you're spending of your available credit limit from all cards combined.
Imagine that you have one credit card with a $1,000 credit limit. If you average $800 per month in spending on this card, that's an 80 percent utilization ratio and will really pull your credit scores down. In order to maximize your scores, you should try to keep this ratio under 30 percent at all times.
4.) Always Pay Your Credit Cards in Full
Once you find the perfect credit card, keep things simple. One or two credit cards should be enough to get yourself started on the right track and develop a positive history of on-time payments.
Use the cards for necessities, remembering to keep your credit utilization under 30%, and then pay off your balance each month. Not just the minimum payment, but the entire balance!
5.) Be Patient - Improve Your Credit Mix
Recent graduates with a new paycheck sometimes get credit happy and begin applying for credit cards, car loans, apartments or mortgages all at the same time. This can unexpectedly hurt your credit scores because the amount of recently opened credit lines and credit inquiries accounts for approximately 10 percent of your overall FICO score. So be patient, and don't apply for too much credit all at once.
The FICO model does like to see a number of different types of credit accounts including credit cards, retail accounts, installment loans and/or mortgages. While a healthy mix of credit indicates you're able to responsibly manage various types of credit, you shouldn't expect to make it happen all at once. Start with a few good no annual fee credit cards, establish a solid foundation, and then expand your credit mix in a conservative fashion over time.
Feel like you've mastered the basics of Credit 101? Take our online credit quiz now to find out your Credit GPA.
