Congratulations, college Class of ’15. New government unemployment numbers make your decision to get a college degree look smart: Unemployment was 5.5% in February, a low number that looks especially good compared with unemployment rates above 9% in the recession. For college graduates, joblessness was even lower: 2.7%.
Here’s the next smart move to make: Have a strategy for using credit and growing your credit score.
Why worry about your credit score?
You’ve got a lot on your mind right now. Do you really need to bother pumping up your credit score?
You do. At the least put it fairly high on your list. Credit scores increasingly are used as a measure of our worth. Your score is supposed to measure the likelihood you’ll repay a loan. Credit card companies and lenders of every type check your score before lending money and deciding what to charge for loans.
A surprising number of others check credit, too, including utility companies, landlords, employers, government agencies and insurers, in deciding whom to do business with and what to charge. “In New York City, credit checks are even sometimes used to screen dog walkers and janitors,” writes the New York Times.
The lower your score, the more you pay for loans and insurance. You’ll be at a disadvantage with landlords in an already tight rental market. And if you plan to buy a home, you’ll be shut out or pay far more than your peers who have good credit. (This article explains how a 639 FICO score could cost you $70,000 more for a mortgage than it would if your score was 760.)
It can seem unfair, but people who manage money well get the best deals, helping them to save still more money.
Convinced yet? If you are, take these steps to help boost your credit.
1. Understand credit
Opening a couple credit card accounts and taking out a small, manageable loan can improve your credit score, assuming you make every payment on time.
You might be surprised by how credit works. For example, it may seem counterintuitive, but having no credit cards makes you appear like a credit risk to the scoring system because it has no information to go on for assessing your creditworthiness.
Remember, too, that when you apply for credit, lenders look at other things besides your score, including any collections, bankruptcies, charge-offs, court judgments against you and how long ago they happened.
2. Pay on time — every time
Nothing matters to your credit more than making every single payment on time. Your payment history accounts for a whopping 35% of your credit score, more than any other factor. (Here’s how FICO, the inventor of the credit score, explains what goes into its scoring).
To make sure you won’t forget:
- Set up automatic bill payments through your bank’s website. Put your vehicle loan, electric bill, mortgage or rent, cable service and the like all on auto-pay.
- Or, automate your payments by making arrangements with each creditor if you’d rather. You can do this on the company’s website, or call its office for help setting it up.
With credit card bills, your monthly balance can vary widely. If an unpredictable payment could throw off your bank account, set up calendar reminders for paying your credit card bills and make backup reminders so you’re covered in case you slip up.
3. Think before you borrow
When borrowing — and that includes shopping with credit cards — every dollar of interest you pay is a dollar you aren’t able to save or use for something you need or want. To stay alert with credit, think of it much as you do alcohol: It can be risky, so think about what you’re doing and plan your moves.
4. Use your head with credit cards
Credit cards are seductive yet necessary. Settling on a well-balanced relationship may at first require some time and experimentation. A few tips:
- Don’t use it just because it came in the mail. Limit the number of cards you have; investigate the benefits and costs of each and decide if it fits your needs.
- Stay in the driver’s seat. Shop for loans and credit cards: compare interest rates, annual fees and card features.
- Good habits allow freedom. If you (truly) pay off your card balance every month, you can focus your shopping on features like rewards and fees instead of focusing on rates.
5. Keep up those thrifty habits
If you got through school eating ramen and perfecting the cheap or free date, good for you. Don’t stop now.
When you have a job and a spending plan, you can budget for spending more in certain categories, including budgeting for regular planned splurges. But don’t stop budgeting and tracking your spending. The feeling of being flush can get you into trouble if it leads you to overspend or commit to too much debt.
6. Mix up your credit use
Using a mix of credit types is healthy for your score. There are two kinds of credit:
- Open-end or revolving lines of credit: Credit cards, for example, which let you pay back a little or a lot, borrowing against a credit limit.
- Closed-end or installment loans: Auto loans and mortgages are examples of installment loans, with fixed payment amounts and a fixed pay-off date.
Your mix is one factor used in calculating your credit score. It shows your ability to handle both cards and loans. Although it accounts for just 10% of your credit score, “having credit cards and installment loans with a good payment history will raise your FICO Scores,” says FICO.
7. Get credit for everything you do
Your credit score can get a nice boost even if you are not using credit cards because, as you know, on-time payments are gold when it comes to building a score. If you have a strong on-time payment record, ask your utility companies, cell phone provider and landlord to report your payments to the three major credit bureaus: Equifax, TransUnion and Experian.
8. Know how much is enough
While a mix of credit types helps your score, the amount matters more: It accounts for 30% of your credit score.
Also, make sure you are using just a fraction — less than 30% — of the amount you are eligible to borrow. With credit cards, that means using less than 30% of your credit limit on each and every card. For example:
- If your credit limit is $250, borrow less than $83.
- If your limit is $2,000, keep your borrowing to less than $666.
This sounds a little odd, admittedly (Why have the credit if you can’t use it?). Still, consuming just a small proportion of your available credit is a surefire way to pump up your score.
Also, apply for credit infrequently and carefully. Says FICO:
There is no magic number of applications that you should limit yourself to, but in general, the fewer the better. In fact our research has shown that people who apply for credit multiple times within a short time period tend to overextend themselves and are more likely to default at some point.
9. Watch your credit report
Errors on your credit report can damage your credit score, so it’s important to get a free credit report at least once a year from AnnualCreditReport.com.
Keeping an eye on what your creditors report to the three major credit agencies also lets you catch any fraud or identity theft, which can wreak havoc on your credit score. It also lets you catch and correct errors (they are not uncommon) reported by creditors.
10. Whittle your student loans
The bottom line of your student loan or loans can be daunting. But don’t let that stop you from chipping away at your loans until they’re gone.Your credit score will shine brighter as your loan balances diminish, showing you using less and less of your available credit.
11. Get the loan before car shopping
The chances are excellent that an auto dealer is not the cheapest source for your auto loan. With that in mind, find a loan with the lowest rates possible before walking onto a dealer’s lot or showroom, not after.
12. Start small
When you are establishing credit, use these starter moves:
- Apply for a credit union credit card. It might be an easier place to get your first card than from a bank.
- Use a secured card. Secured cards are a good way to practice using a credit card: You make a deposit that becomes your credit line. Yes, it’s your money, but remember to use only 30% — at most — of your credit line. Your goal is to build credit, remember? Secured cards come with advantages and disadvantages. The details count.
- Ask if your performance is reported. Some secured cards report your payment track record to the big three credit reporting agencies, but others do not. Choose those that report.
- Shop carefully for fees. Secured cards can be expensive, so pay careful attention to the deal you’re getting and do plenty of comparison shopping.
- Get a card with a grace period. If your card has no grace period, it will be nearly impossible to avoid paying interest.
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