Young people graduating from college have a lot of things on their minds. The usual suspects are student loans, finding a job and eating food. And not necessarily in that order. One thing many graduates don’t think about is their credit score, and this can end up costing them a lot of money in the long run. All it takes is using a credit card responsibly and appropriately to start a long term history of great credit.
Most people will end up buying a house or a car in their lifetime. They might also rent an apartment or sign up for a credit card. In most of these cases, the company will want to know what kind of borrower you are. Instead of taking the time to look through all of your transactions, the company will look at your credit score.
Fair or not, it is essentially a summary of your credit worthiness boiled down to one single number.
How Can I Get a Good Credit Score?
The most widely used credit score is the one by FICO, which calculates your score on a scale from 300-850. While the exact algorithm the company uses to calculate your score is not known, they do make it known what factors make up your score. This way, you can easily figure out what you need to do to improve your score.
According to the chart on their website, 80% of your credit score is determined by your payment history (35%), amounts owed (30%) and length of credit history (10%).
Want to check your credit score? Sign up for Score Watch from MyFICO.com.
All three of these factors can be optimized by simply signing up for a credit card early in your career and using it wisely. Here’s how.
Payment history
This looks at your history of on time payments. You obviously want a long history of on time and, ideally, in full payments on your credit card. That means paying off the total amount of your bill before the due date.
Every.
Single.
Time.
Amounts owed
This mainly looks at the amount you owe versus your credit limit, typically referred to as your credit ratio. If the limit on your card is $1,000 and you routinely spend $999 every month, that doesn’t look good at all. You want to have a low ratio, meaning if your limit is around $1,000 you want to spend around $200. This means that increasing your credit limit is actually a good thing, as long as you don’t increase your spending.
Length of credit history
There’s nothing you can really do about this except to get a time machine and zip 10 years into the future. Lenders want to see that you have an established history of paying your debts on time, so that’s why it’s important to get a card early on and use it wisely. Getting a card in freshman year and listening to the words of wisdom in this post will already give you a solid 4 years of good credit history.
Looking at the FICO chart can also tell you what NOT to do with that credit card. Doing things like being late with bills and maxing out your credit limit will throw up numerous red flags and will cause your score to plummet. While it’s good to acknowledge your mistakes and learn from them, it’s even better to recognize them beforehand and never make them in the first place.
Having a great credit score will give you favorable interest rates on your car loan, mortgage or any other loan you may have to take. This can lead to savings of thousands of dollars over one’s lifetime. Starting your credit history with responsible credit card use can go a long way to make this happen.
Are you ready to build credit wisely? Click here to see the card I recommend as the best credit card for young adults. The card allows you to get your credit score free each month.