If you’re a new graduate, you may well be taking steps to live independently, possibly for the first time. But wherever you find yourself, your post-college life will undoubtedly include a credit card. Maybe even two. You may already know some of the pleasures and pitfalls of plastic. But now's the time to get serious about when and how you use it. Managed responsibly, credit cards can help you build the kind of credit history that will make your life easier, almost from day one.
A stellar credit history leads to an excellent credit score. In turn, an excellent credit score will help you rent an apartment (and, perhaps, beat out other applicants who lack your excellent record), get a lower rate on a car loan and even save money on health insurance and, eventually, a mortgage.
Another reason to build a good credit history? A potential employer might scrutinize your credit report. A survey by the Society for Human Resource Management found that 47% of employers said they looked at credit reports of job applicants. Granted, they won’t see your actual credit score, but your credit report will show if you have missed payments or have an account in with a collection agency.
Fortunately, following a few simple rules about credit cards will put you on your way to building a great credit history. Even better: You’ll stay out of credit card debt.
#1: Know the rates and fees for your credit card
Yes, this means you have to read the fine print. The way to protect yourself from ugly surprises is to know the rates and fees your credit card imposes.
It’s a bit boring, for sure, but you’ll find nuggets of information that can keep you out of trouble. For instance, cash advances can have interest rates around 25%. What’s even worse, interest on cash advances kicks in right away. Understanding the terms of your card will help you avoid costly mistakes.
#2: Have a budget in place
Build a blueprint for how you want to spend your money and how much you want to save every month. When you have a budget, you know exactly how much you can spend on each category, such as groceries or entertainment.
A budget also gives you flexibility to decide how you’ll pay for an expense. Will you pay cash, use autopay from your checking account or use a credit card? The credit-card option is fine as long as you stay on budget and don’t spend more than you can pay off the next month.
#3: Track your spending
You can’t stay within your budget if you don’t know how much you’ve spent. This is where a lot of people lose their way.
You'll find many free online money-management programs, such as Mint.com, to help you track your expenses. There are also numerous smart-phone apps. The most important thing to remember? Once you hit your budgeted limit for a category, put away the cards. No exceptions.
#4: Pay your bill in full every month
This rule applies to all of us, not just new college grads. But now’s the time to make this a lifelong habit. When you carry a balance, you pay interest. Don’t fall into this trap because compound interest is painful. You could end up in credit card debt in a hurry.
These days, most new grads have student loans to pay back. Don’t make things worse by getting into debt with credit cards.
#5: Make timely payments
Late payments can wreak havoc on your credit score. The higher your score, the more it will drop if you have a late payment that is reported to the major credit bureaus. Do what it takes to remind yourself to pay your bills on time. This holds for all of your bills, not just the one for your credit card. Paying your electric bill late could also end up on your credit report and drag down your score.
Most of major credit card issuers offer ways to set up text or email reminders about due dates. If you’re using online money-management software or a smart-phone app, set up notifications. Some consumers prefer to use autopay from a bank account, but don’t set this up unless you know you will always have sufficient cash flow to cover the payments.
Rule #6: Don’t apply for a lot of credit cards right now
When you’re just starting out in your credit life, it helps to take things slowly. If you don't already have a second card, don't apply for one until you've successfully followed Rules 1-5 with one card.
It’s very easy to fall into debt when you suddenly have access to a lot of credit. Learning to manage a small amount before taking on additional cards is more prudent.
The Bottom Line
Follow the rules listed here and your credit life will be off to a good start. It's worth the effort because once you mess up your credit, there’s no way to fix it quickly. If your credit score takes a big hit, it takes about 12 to 18 months to rebuild your history and start boosting your score. That's one problem you don't need.