As a recent college grad, you're faced with many new financial challenges and responsibilities. Learning about and improving your credit might not seem like the most important thing right now, but getting started as quickly as possible actually makes a lot of sense.
Your credit will impact many aspects of your life—from qualifying for a rental to getting a rewards credit card. And your credit can be especially important when it comes time to buy a car or home in the coming years. Having good credit might save you money even if you don't take out a loan because insurance companies in many states consider your credit when deciding how much to charge you.
In the following five simple steps, we'll cover all the basics you need to know about how credit works, what affects your credit scores and what you can do to build your credit.
1. Check Your Credit Reports
Knowing where your credit stands can be important, and you'll also want to understand the difference between your credit reports and credit scores.
Your credit history lives in your credit reports, records of your history with various bills and credit accounts. There are three major credit reporting companies that collect and organize information to create credit reports: Experian, TransUnion and Equifax.
If you've never had a credit card or loan, you might not have a credit report yet. You can use Experian Go™ to quickly establish your Experian credit report and begin building credit. You can also apply for a credit card or loan and begin making payments, which are then reported to the credit bureaus and appear on your credit reports. We'll review some loan and credit card options below.
If you've taken out a loan (including student loans), have a student credit card or a card with your name on it that's connected to your parent's account, you probably have a credit report already.
Reviewing your credit reports can be important because creditors, landlords and employers might want to review your credit report before approving your credit, rental or job application. You want to make sure everything is correct and be prepared to explain any negative marks—such as a late payment or collection account.
You can check your Experian credit report for free and get free credit monitoring that will notify you of changes in your report. You can also request free copies of each of your credit reports on AnnualCreditReport.com.
2. Understand How Credit Scores Work
Your credit reports are also important because they're the basis for your credit scores.
A credit score gives people and organizations a simple way to understand the likelihood that someone will fall behind on a bill payment. There are many credit scoring models—programs that analyze one of your credit reports to determine your credit score. And creditors can choose the type of score (or sometimes scores) they'll use to evaluate your creditworthiness.
FICO and VantageScore® create the most widely used scoring models. Each of their credit scores analyze one of your credit reports to determine your score, and most of the scoring models use similar factors:
- Payment history: Your payment history includes your record of paying bills. On-time payments can help your credit, but if you miss a payment or have an account sent to collections, that could hurt your credit. Payment history is the most important factor in credit score calculations, so paying your bills on time is one of the best ways to build a good credit score over time.
- Credit usage: Your balances on loans and credit cards can affect your credit scores in various ways. One of the most important parts of this scoring factor is your revolving credit utilization ratio—the percentage of your credit cards' credit limits you're using. Only using a small portion of your credit limits is best, and then pay your bill in full to avoid interest charges.
- Length of credit history: How long you've managed credit accounts can also affect your credit scores. For most recent grads, this will depend on how long it's been since you first took out a student loan or opened a credit card, or whether a parent added you as an authorized user on one of their credit cards. The longer your credit history, the better it is for your credit scores.
- Credit mix: Having experience with loans and credit cards, or other lines of credit, can also be good for your credit score. However, this is a relatively minor scoring factor.
- Recent activity: Applying for new credit accounts can lead to a hard inquiry, a record of when a creditor checks your credit report, which can hurt your scores a little. Having a lot of new accounts also might hurt your scores. It can be important to keep this in mind if you're preparing to apply for a major loan, such as an auto loan or mortgage, but don't be afraid of applying for credit when you need it.
Credit Score Ranges
Credit scores from the most widely used scoring models range from 300 to 850, and the higher your score, the better. Creditors may also group consumers into different categories based on their credit scores. Here are the ranges for FICO® Scores☉ , the credit scores used by 90% of top lenders:
- Exceptional: 800 to 850
- Very good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
You have a good credit score if your FICO® Score is in the 670 to 739 range, which means you can likely qualify for many credit cards and loans. But if you improve your credit score and get into the very good or exceptional ranges, you may qualify for even more options and receive better interest rates and offers.
If you want to see where you're at, you can check your FICO® Score for free with Experian.
3. Start Paying Off Your Student Loans
If you're like millions of other college graduates, you're leaving school with student loan payments on your mind. As of the third quarter of 2022, Experian found the average student loan balance was $39,032.
Your student loans might have helped you establish and build your credit history, even if payment pauses, deferment or forbearance let you avoid making payments while you were in school and immediately after graduation. But once payments start, making your payments on time is important for building good credit.
If you're struggling with payments, review your repayment plan options and see if switching plans might make your monthly payment more affordable.
4. Apply for a Credit Card to Build Credit
Having several credit accounts and a mix of different types of credit can help increase your credit score. Credit cards can be a simple way to do this, and many credit cards also offer rewards, protections and other benefits that can make them a safer option than using your debit card.
Although some of the best credit cards require very good or excellent credit scores, there are also many options for people who are new to credit or don't have a credit history. These include secured credit cards, which require you to give the card issuer a refundable security deposit when you open your account, and credit cards that use your bank account information rather than your credit history to determine if you qualify.
No matter the type of credit card you get, try to follow a few best credit card practices:
- Don't spend more than you can afford to pay off each month. In other words, treat the credit card as if it's a debit card. This can be harder than it sounds, especially if your credit card offers enticing bonuses or rewards, so think about your budget and how you'll avoid overspending.
- Pay the statement balance in full. If you do this, you won't have to pay interest on your purchases. If you don't pay off your balance each month, you'll accrue interest on the amount you don't pay, and your new purchases will also start to accrue interest right away.
- Make early payments if you have a high balance. Even if you plan on paying your bill in full, you might want to make an early payment to bring down your balance before the end of your billing cycle. Credit card companies generally report your balance at the end of each billing cycle, and the balance they report can affect your credit utilization rate and credit scores. A lower balance could help your credit scores.
You'll also want to review your card's terms and features to make sure you're taking advantage of everything the card has to offer. For example, some cards give you a statement credit (sort of like a refund) on certain purchases or extra benefits when you're traveling.
5. Get Credit for Other Monthly Payments
Most of the payment history in people's credit reports comes from loan and credit card payments. However, you might be able to add other types of payments to your credit report and increase your credit score.
Along with free credit reports and scores, the free Experian membership gives you access to Experian Boost®ø. Use it to connect your bank and credit card accounts and then add eligible rent, utility, cellphone and select streaming service payments to your Experian credit report. These on-time payments can improve your payment history—boosting your resulting credit scores.
Keep Tracking Your Credit
Building credit can take a long time, but knowing how credit reports and scores work gives you a good foundation. Making your loan and credit card payments on time can also put you on the path to having an excellent credit score—your future self will thank you.
Experian's free credit report and score monitoring make it easy to track your progress, and you'll see personalized insights into what's affecting your credit score the most. Additionally, whenever you need a loan or want a new credit card, you can get matched with offers based on your unique credit profile.