7 Credit Tips For Graduating College Students
Getting off on the wrong foot with respect to credit can be disastrous. Horror stories of a parent opening up a credit card in the name of their child and ruining that child’s credit through their financial irresponsibility are not uncommon. However, while it is unfortunate that victims of familiar identity fraud must go through a significant hassle to clear their credit scores, the situation where someone is irresponsible with their own lines of credit cannot be understated either.
As a graduating college student with squeaky clean credit, one of the first things that you should be thinking of is how to further improve your credit score over time. The time of graduation is special because most college students will also be either beginning work or be applying for their first jobs. This means that they’ll have a lot more money to spend after they collect their paychecks – this changes the entire playing field in regard to credit.
Today, we’ll explore some of the ways that you can keep your credit under control and some good habits to develop which will help you reap the benefits of stellar credit.
Understand What Determines Your Credit Score
The Roman stoic Seneca once stated that “No wind blows in favor of a ship without direction.” This means that if you don’t know what you’re doing or where you’re going, any changes in your circumstances will not be helpful to your situation. Approaching credit blindly is comparable since any attempts you make to improve your credit will be detrimental if you don’t know how your credit score is calculated in the first place. As CreditRepair notes, The key components employed by most credit rating organizations such as FICO and Experian and their relative weight are listed here.
- Payment History (35%)
- Debt Amounts (30%)
- Length of Credit History (15%)
- Credit Mix (10%)
- New Lines of Credit (10%)
Credit Utilization Ratio
The credit utilization ratio is a fancy term for how much credit you use in comparison to the total amount of credit you have available to you. It’s a ratio between those two values actually. You want to keep this ratio at around 30% or lower, so if you have a $10,000 line of credit, it’s best if you try to only use $3,000 every month.
The rationale behind this is that people who are more responsible with their money and less likely to default on their debts will depend less on their credit when paying off money.
Have a Varied Credit Mix
Warren Buffett actually takes a contrarian stance against diversification: “Wide diversification is only required when investors do not understand what they are doing.” But believe it or not, banks and credit bureaus actually take a look at the diversity of the types of debts when determining your credit score. It makes sense when you consider that banks are trying to minimize their risk since they really do not know how their customers will behave when spending. Having a decent mix of different debt structures like revolving or installment debts can help out your credit score because it demonstrates to these financial agencies that you can handle and keep track of more than one payment type.
Pay Your Debts on Time
One of the foremost contemporary philosophers and social critics, Noam Chomsky, described debt as a deadly trap: “If a business, say, gets in too much debt, it can declare bankruptcy, but individuals can almost never be relieved of student debt through bankruptcy.” This should really be a common sense principle for anyone trying to improve their credit. You need to pay your debts on time or else your credit score will suffer and plunge dramatically and it will be harder for you to borrow money to reverse the impact of bad credit.
Start Building Your Credit Early
If you’re already graduating, then you probably have been using your credit card for purchases here and there. What you want to do when you’re actively aiming to get a better credit score is to stay consistent with your credit card usage so that you have a longer history. A longer and more reliable history of credit payments will result in a much better outcome for your credit score.
Keeping track of your expenditures makes much more of a difference than you might think. It’s important to get a program like You Need A Budget (YNAB) to help you manage and visualize where your money is going. Being responsible with your payments is one of the fundamental aspects of building good credit. This is especially true if you’re planning for big life events like buying a house or planning a wedding.
Apply for Credit Increases Every Six Months
Most banks will give you a greater line of credit if you’ve shown that you can handle your current line of credit reasonably well over a period of time. If you go in six months and you’ve followed all of these tips, it’s possible for you to be able to make a trip to your bank and request more credit. If you demonstrate that you’re responsible handling greater amounts of money, then your credit score will increase proportionally.