How to Establish Credit

September 12th, 2011, by

Q: I recently graduated from college. How can I build credit?

A: What I’d like you to do before worrying about building credit is to build up some savings.

If you are like many recent graduates, you probably have a hefty amount of student loan debt. So, the last thing you should be doing is building up credit, because that means you are taking on more debt. Your credit history is all about your use of debt. Your credit score is all about how you use debt. You have a lifetime to learn how to use debt.

Learn to rely on your cash for now. Work on building up an emergency fund of three to six months of living expenses. At the same time, work on building up what I call a “life happens fund,” which is a stash of money you’ll tap when you have unexpected expenses. Having this account prevents you from draining your emergency fund.

So, what if you don’t have any student loan debt?

Ok. Why do you need credit? For a car? For a home?

Or, maybe you are worried that the lack of credit will hurt your chances of getting a job, because more and more employers are looking at people’s credit history. If that’s a concern, you can simply let a prospective employer know that you may not have a credit score, or a good one, because you’ve been a good steward over your money and have chosen not to lean on debt so early in your life.

Now, I’m practical; so, I know at some point, you may want to buy a home, and you’ll need a good credit history. In that case, you can start building credit by getting a secure credit card if you don’t have a regular credit card and can’t get one. With a secure credit card, you put money in a bank—about $250 to $500—and that is used as your credit line. The credit card company uses the money in the bank as collateral against your credit purchases. Use the card to buy something and pay the bill off on time. Then just put it away. And wait. Wait for that card history and your paying off the bill to contribute to building up your credit history.

If you have a banking relationship, you can check with your bank to find out if it offers a secure card. Or, you can go to bankrate.com to find the best secure card deals.

One final thing: You should know that if you have a car loan or student loans, you are building credit. And, the best way to build up your credit is to pay your bills on time.

Last modified: September 12, 2011 at 12:31 am