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5 tips to help new grads build credit

Now that you're in the real world, there's a very important number you need to learn about: Your credit score.

By Stacy Johnson May 14, 2012 11:25AM

This post comes from Brandon Ballenger at partner site Money Talks News.


Money Talks News on MSN MoneySo, you've just graduated from college. Congratulations and welcome to the real world. If you're like the majority of recent grads, your status just changed from "student" to "unemployed."


The Wall Street Journal, citing an unreleased academic report, said just 49% of students who graduated between 2009 and 2011 "had found a full-time job within a year of finishing school."

The article also mentioned the growing student debt burden and lower salaries for entry-level work.


All of this makes good credit even more important for college grads because credit can matter when you apply for a job, as well as when you apply for a lease, insurance or any kind of loan. In the video below, Stacy Johnson offers some tips for grads on establishing solid credit. Check it out, then read on for more advice.

1. Think before you borrow. When you were living on campus, you were probably poor and and always looking for free food. So once you land a job, there's a big temptation to indulge yourself. 


Better idea: Maintain the thrifty habits you learned in college. Every dollar of interest you pay is one less dollar you have. Keep and invest those dollars, and you'll earn interest. So, if you have a credit card, pay off your balance every month.


2. Diversify. There are a lot of misconceptions about how credit scores work. Here are the components of your credit score:

  • 35% -- record of on-time payments.
  • 30% -- amount owed.
  • 15% -- length of credit history.
  • 10% -- new credit.
  • 10% -- type of credit used.

Young college grads are at a disadvantage because they haven't had the opportunity to establish a record of on-time payments or a long credit history. "Amount owed" sounds obvious, but it's important, so we'll cover it separately in Tip No. 3 below.


"New credit" refers to applications for credit. Regularly applying for new credit makes lenders think you might be desperate or bad at managing money. If you must make multiple credit inquiries, do so within a small window, and keep applications to a minimum.


"Type of credit" means lenders want to see you're well-rounded and can manage different kinds of credit. The two types are open-end or revolving lines of credit (like credit cards, which you pay back at your own rate and can borrow from again) and closed-end or installment loans (such as auto loans and mortgages -- loans with fixed payments and a fixed payoff date).


Ideally, you want to have both types, but you don't have to buy a car or house to get the latter kind. If you have student loans, you already have closed-end credit. If not, try a signature loan. We explain them in "8 tips to get credit when you don't have any."


Image: Woman with paperwork (© Corbis)3. Don't overdo it. Let's get back to "amount owed." Part of this component is a utilization ratio of how much you owe relative to how much you're approved to borrow. You don't want to exceed 30%, so if you have a credit card with a $1,000 limit, try to keep your balance below $300. (Estimate your credit score for free.)


4. Start small. As the credit score breakdown shows, young adults are at a disadvantage because they're missing both a long credit history, and a record of paying on time. So how can you build credit when you can't getcredit?

One idea is to join a credit union, which is like a bank but can be more flexible about lending. Another route is a secured credit card -- easy to get because you deposit money in an account to guarantee the credit line. Make sure the card you pick reports your on-time payments to the major credit bureaus and doesn't have high fees and lousy terms.


5. Be punctual. The best way to make sure your payments are always on time is to schedule or automate them. Then budget well, and start building an emergency fund of three to six months' living expenses. You can't avoid unexpected expenses, but you can prepare for them.


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