I Am a New College Graduate. How Do I Establish Credit?
Bigg Challenge
Leah just graduated from college. She has applied for several credit cards and been turned down because she doesn’t have any credit history. She says she’s never borrowed before or even had a credit card. Her bigg challenge: How can she establish credit?
Bigg Advice
Great question, Leah! Here are 3 tips to get started:
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#1 – Get a bank loan.
This will cost you a little but it will be worth it so you’ll have access to money when you need it. Here’s a way to definitely get a loan:
Deposit $1,000 into an account (e.g. a Certificate of Deposit, commonly known as a CD) for a fixed period of time (e,g. 3 months). Ask that same bank for a $1,000 loan to be paid back at the end of the three months. They may require you to pay the interest monthly, or they may not.
Your loan is 100% secured by the CD, so the only risk the bank has is that you won’t pay the interest. You’ll earn interest on the CD, but not as much as you’ll pay on the loan, so you’ll be out-of-pocket a little bit of money.
But you’re establishing credit. At the end of the three months, pay back the $1,000. Now, up the ante. Do the same thing all over again with say $2,000. Then again … each time increasing the amount. Over the course of the year, you may do this four times.
Keep the amount relatively small because you don’t want to needlessly pay interest. You’re establishing that you can pay back a loan of $1,000, $2,000 or whatever the highest amount is that you borrow. Just make sure you make every payment on time.
#2 – Have a savings account, not just a checking account.
You’ll look more favorable to certain companies if you also have a savings account. Don’t think you have to stuff it full of money. It just seems to make a difference that you actually have one.
#3 – Keep a landline phone number.
Some companies seem to feel that this demonstrates stability. They reward you for it by extending credit. So at least while you’re trying to establish credit, maintain a landline phone number.
Thanks, Leah for sending us your bigg challenge.
Our bigg quote today comes from Benjamin Franklin:
So establish your credit and score!
Next time, we’ll discuss why work life balance doesn’t work. Until then, here’s to your bigg success!
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Good tips. But, why does one need a credit card – I am just paying mine back, and then cut it in half.
Paying ridiculous percentages (in my case 34.7%) for using money I don’t actually have.
What is it that makes living without a credit card impossible?
Just curious.
Roland, great point. However, it is still important to be able to access credit…for example a bank loan. That’s the only way that you’ll be able to take advantage of significant opportunities (e.g. starting a business, buying an investment property).
Ok, I have to admit, that here where I live there is NO positive credit system.
Whether you get a loan depends on your income and any loans you currently pay.
And if you don’t pay you get on the BAR list which means : no loan whatsoever for a few years.
So having a credit card actually hurts your chances to get a loan here.
Roland, once again you make a good point. In the situation that we’ve addressed in our Bigg Challenge today with Leah, she wasn’t even able to get a credit card, or even a loan b/c she didn’t have credit established.
If you deposit $1,000 in a bank account, and then in essence borrow that money from the same bank, they will (in most cases) happily make the loan. It’s costing a small amount of money b/c of the difference in what you are earning and what you are paying in interest.
However, repayment is not an issue b/c you are going to use the money in the bank to pay the money owed to the bank. What you are accomplishing by doing this is proving the ability to repay a loan AND establishing your credit in the first place.
Roland if you have a question that we are not answering, type us a message in our Bigg Challenge box on our blog today so we can offer some suggestions specific to your situation. Thanks for the conversation today!
Good start for student. It’s very important that people who graduate can easily receive such information.
Education is the main point in society development.
Steve, glad you found the information useful. Thanks for your comment!