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Advice for College Graduates with Little or No Credit

Establishing a good credit history is more important than ever. Qualifying for mortgages, auto loans, apartments, and even jobs have become dependent to some degree on your credit history. So graduating from college without any or just a little credit is bound to be rough at first. Ironically, the worried students who heeded the ominous warnings about signing up for a credit card may have a much harder time than their former credit card carrying classmates in establishing their credit (assuming their peers didn’t rake up hefty sums in credit card debt). Building credit after graduation may also be tougher because credit card companies may no longer assume your parents will pick up the bill. Fortunately, there are steps that can be taken to build credit after college. Here are some things to consider:

• Consolidate your student loans, so you have one monthly payment, and make all your payments on time! Timely loan payments are the best way to build a good credit history.

• Apply for a gas or department store charge card. These credit lines may be easier to qualify for than major credit cards, and most report to the national credit reporting agencies. However, before applying for a department store, gas, or even a major credit card, make sure the company reports to the major credit bureaus. There’s no point maintaining a charge card if it won’t be reflected in your credit report.

• Because you often need credit to build credit, obtaining major credit cards can be tough. One option is to open a secured credit card account. A secured credit card requires you to deposit and maintain money in a savings account for security. The required deposit and APR vary by credit card company; interest rates can be anywhere from 10% to 25%.

• High rates are a fact of life when you have little or no credit. With no credit history, lenders and creditors will treat you as high risk, which means high interest rates until you establish good credit.

• Once you qualify for your own credit card, use it, but make sure you always pay off your credit card bill on time. A late payment of even 30 days can show on your credit report for up to 7 years.

• Try not to exceed 30% of your credit card’s credit limit. Large credit balances can cause your credit score to drop. Credit scores are statistical scores based on your credit report that predict the probability of your defaulting on your credit obligation. A good credit score can be helpful to obtain more credit when you need it and at a lower interest rate.

• Some financial advisors suggest taking out a small installment loan, for example an auto loan, to help establish your credit history. Again make sure the lender will report your credit history to a credit bureau, and remember that in order for the loan to reflect positively on your credit report, always pay your bills on time! Late payments equal derogatory information on your credit report and may lower your credit score. Again, a timely payment history is the best way to prove you are responsible with credit.

• If you do not qualify for a loan by yourself, or you simply want lower interest rates, consider having a close friend or parent with established credit co-sign a loan with you. Paying your bills on time will be even more important with a co-signer, because your payment history will now appear on their credit report as well as your own.

• Only apply for one credit card at a time. Each time you apply for credit, creditors may pull a copy of your credit report. This is recorded at the credit bureaus in your credit file as an “inquiry”. Too many inquiries can hurt your credit score.

• Numerous accounts are not needed to build good credit. A few strong credit lines, like a major credit card (a revolving account) and an auto loan (an installment account), may be enough to get you started.

In summary, be careful with credit. Approach it prudently. Apply for a little at a time; only enough so you can control it, not the other way around. Keep in mind that if you are not careful, too much debt can easily become a depressing financial burden instead of a useful tool to enrich your life. It’s your choice. Good luck!