Graduation can be an exciting and exhilarating time, but if you thought the era of grades and scores was over, I have some bad news: It’s not. While the As and Bs are behind you, they’ve been replaced with another number … a tricky little three-digit number called your credit score.
Your credit score is a calculation of your creditworthiness based on your credit history. It may be a lot to process right now, so I’ll do you the favor of a formal classroom education and just give you a handful of red flags. If you follow these simple guidelines, you can avoid many of the pitfalls new graduates suffer when it comes to their credit. (I recently wrote a guide with money tips for new grads, you can check it out here.)
1. Don’t Miss Payments
Your credit score is affected by a bunch of different factors, but the biggest one by far is your payment history.
Graduation is a time of celebration and a time of chaos. You’ll probably be moving, visiting friends and family, and otherwise enjoying your first unencumbered summer. In that chaos, it’s very easy to forget about certain, less-exciting, financial obligations. But credit cards, utility bills and other payments can come back to haunt you.
Be sure to set up auto-pay or email reminders so you do not forget a single payment. Missing payments will lower your credit score, and it would be a shame to tarnish a great credit history just because you were too busy having fun.
2. Apply for New Cards Sparingly
Once you start working, your income will increase. You could start seeing a lot more credit card advertisements and promotions come your way. Or maybe all those stories about travel hackers taking five figure vacations for only a few hundred bucks have perked up your ears.
But, every time you apply for a credit card, the issuing bank will make a hard inquiry on your credit report. Each of those hard inquiries will lower your score by a few points. Do this too often, and you could put a serious dent in your score.
It’s not a problem to apply for one or two credit cards, and it can be good for your score if you need them, but don’t go overboard.
3. Review Your Credit Reports
You have three main credit reports — Experian, Equifax and TransUnion — and the Fair Credit Reporting Act mandates that you can access them (and any other smaller bureau’s credit reports) once every 12 months to review them for errors and inaccuracies.
It’s a good idea to visit AnnualCreditReport.com, the government run website that helps you get your reports for free, every single year, to review your reports. Fixing any errors will take time, and the last thing you want is to try to fix your report while getting a mortgage loan.
I use what I call the Waterfall Method to stagger my three credit report requests, so I get a peek at a report every four months.
4. Don’t Be Afraid of Credit
If you don’t have any loans or use a single credit card, that can cost you. If your credit reports don’t have any installment or revolving lines of credit, the scoring equation has nothing to use to calculate your score.
No history can be just as bad as a poor credit history.
It’s important that you have (and use) a little bit of credit so you can demonstrate some history of using credit responsibly. That doesn’t mean you should carry a balance on a credit card — which isn’t necessary to having a good score — but it does mean getting credit is important.
5. Think Twice Before Co-Signing a Loan
As a new graduate, it’s unlikely you will be asked to co-sign a loan. But if you are, think twice before you agree to it.
Co-signing a loan, say, for a friend who can’t get one on her own, means you are on the hook for it as well. Co-signing means both people have full responsibility. If your friend fails to make a payment, the bank will go after you. If your friend misses a payment, it will be like you missed the payment, and that can wreck your score.
Avoid these credit land mines, and your credit score will be in great shape. You can monitor your progress by checking two of your credit scores, updated each month, for free on Credit.com.
More on Credit Reports & Credit Scores:
- The Credit.com Credit Reports Learning Center
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report