Establishing credit when you’re just starting out can feel a bit like a catch-22: to establish credit, you need to get credit; to get credit in the first place, you need to have an established credit history. It can be an infinite loop of frustration (one you should get familiar with if you’re a recent grad — to get a job, you need work experience, which you can only get if already have a job . . .).
Luckily, breaking free of this paradox isn’t as hard as it initially sounds if you know where to start and know what to do once you get going.
Establishing a credit history right out of college is one of the most important first steps you can take toward your financial future— it can help you get approved for car loans and mortgages and qualify you for better interest rates that will save you money.
So here are 3 easy steps you can follow to get credit, build your FICO® Score, and keep your credit history moving in a positive direction.
Step 1: Learn what building credit entails
It helps to know what factors can positively or negatively influence your credit history before you go about building credit.
So the first step is learning what it takes to maintain a good FICO® Score in order to build a strong credit history. Browsing our education pages is a good place to start, but here are the basics:
- Make payments on time, every time. If you want to start building your credit, you better be prepared to make on-time payments every month. Even just one late or missed payment can seriously affect your FICO score, especially when you don’t have a very long credit history.
- Don’t max your card out. Your first credit card probably won’t come with a sky-high credit limit, but if you ever hope to get a credit line increase, you should be careful about getting close to or right at your limit. Maintaining a healthy distance between your balance and your limit can help improve your FICO® Scores and establish a pattern of responsible credit use.
- Don’t apply for a bunch of new accounts all at once. Whenever you apply for credit, the credit issuer will pull your credit report to help decide whether to approve you. This usually results in a slight dip in your FICO Score. If you’re credit history is short or non-existent, the cumulative effect of applying for multiple new lines of credit within a short timespan can have a more serious impact on your credit score—one you can’t afford this early in the game.
Step 2: Choose the right card
Once you’ve learned what it takes to responsibly manage and build your credit, you’re ready to start shopping around for a credit card. Your options are probably going to be limited, but that doesn’t mean you shouldn’t familiarize yourself with the various “entry-level” credit cards you might qualify for.
- Student Cards. If you’re still in school and want to get a head start on building credit, student credit cards might be right for you. They usually have a low credit ceiling and require a co-signer (you can ask your parents to co-sign—persuade them by letting them know how you plan on using the card responsibly to build your credit history). But they’re a great way to learn the ins and outs of managing your credit. Some student cards are even designed to reward you for responsible credit behavior, so you get bonus rewards and learn good credit management habits at the same time. A win-win.
- Store Cards. Department store cards can be a good option for anyone who’s having trouble getting accepted for a regular credit card. They might be easier to get approved for. It’s not uncommon, though, for a store card to come with a high interest rate, so it’s best to choose a card at a store you frequently shop at anyway and make sure to only make small charges that you can pay off in full every month.
- Secured Cards. If you’re finding it near impossible to get approved for a credit card, a secured card is a great way to get your foot in the door and start building your credit. Secured cards require a security deposit as collateral, so you’re basically borrowing money from yourself. Think of secured cards as stepping stones to regular credit cards. They allow you to establish credit and develop smart credit management habits so that when you do get approved for regular credit cards, you’ll be prepared.
Our Savings Center is a great place to look for credit cards that match your qualifications and needs.
Step 3: Graduate
Yes, building credit has its own sort of graduation ceremony. It doesn’t involve wearing a cap and gown, but once you’ve paid your dues and learned the rules of maintaining your credit, you’ll have the chance to increase your credit limit or apply for new cards that offer various rewards and incentives. You’re ready to really start playing the credit card game.
One final tip: just because you’ve moved on to bigger and better things, you shouldn’t necessarily close your old accounts. The more available credit you have, the better your credit utilization ratio, which can improve your FICO® Scores. So unless you’re paying an annual fee, it doesn’t hurt to leave an unused account open.