Graduating College With No Credit? Here's Where to Start
by Christy Bieber | Updated Jan. 30, 2022 - First published on May 6, 2019
What should you do if you're graduating college with no credit? Take these steps to start building a solid credit history and an excellent credit score.
Building credit is important. Not only do you need a good credit score to get approved for loans, but employers, landlords, auto insurers, and others you do business with also look at your credit history to get an idea of how trustworthy you are.
So if you're graduating college and you have no credit history at all yet, you need to start building credit so that landlords and lenders will recognize that you're a responsible customer whom they should be eager to deal with. If you're not sure where to start, keep reading.
Understand how your credit score is determined
To build credit, you need to know the different factors that determine your credit score. The most important factors include:
- Payment history: This is the most important component of your credit score, and it reflects your record of making payments on time. If you make a payment 30 days late, or if you get judgements against you for not paying your bills, your score will take a serious hit.
- Credit utilization: This is also a highly important factor in determining your score. It reflects how much of your available credit you use. For example, if you owe $500 on a credit card and you have $5,000 in available credit across all your credit cards, then your utilization ratio is 10%. A lower utilization ratio is better, and you should always try to keep it below 30%.
- Length of credit history: The average age of your credit accounts is important to your score. The longer your credit history, the higher your score will be. Opening new credit cards, taking out new loans, or closing older accounts will shorten the average age of your credit history.
- Your mix of credit: Ideally, your credit report will show you've used different kinds of credit responsibly. This could include credit cards, personal loans, and auto loans.
- Inquiries: When you apply for a credit card or a loan, lenders perform a "hard inquiry" -- a type of credit check. A hard inquiry will put a small dent in your credit score, and it stays on your credit report for two years. A large number of inquiries within a short time frame can do more serious damage.
Learn these credit scoring factors by heart so you can make responsible choices when applying for and using credit.
Open the right type of credit card
You need to establish a positive payment history to build credit, and the easiest way to do that is to get a credit card. But not all card issuers will give you a card if you don't already have a good credit score -- so you're kind of stuck in a catch 22.
The good news is that many credit card companies offer student credit cards or credit-builder cards that don't require a credit history. If you can't qualify for any of these, you could also get a secured credit card. A secured card requires you to put down a security deposit that's equal to your credit line. For example, if you want $500 in available credit, you'll need to give the lender $500 up front. This insures the card company against nonpayment; if you don't make your payments, then the issuer will simply withhold the amount you owe from your deposit. So long as you make your payments, however, your deposit will be fully refunded when you close the account.
So long as the card issuer reports to the three major credit reporting agencies -- Equifax, Experian, and TransUnion -- a secured card can be a great way to build credit. Just make sure you won't be paying high fees, and pay attention to the APR, because odds are the interest rate will be very high if you carry a balance.
Once you get a credit card, you'll need to use the card and pay it on time so you can build a record of responsible credit use. The good news is that you do not have to carry a balance to build a good payment history, and you shouldn't do so.
You should ideally make a few small purchases with your credit card and pay off the card in full each month. You don't want to max out your cards, as this would hurt your credit utilization ratio, and you never want to miss a payment, as this will do tremendous damage to your credit score.
If you don't trust yourself to limit your charges to an amount you can pay back, you could just charge one small fixed monthly expense -- like a streaming subscription -- to your card and set up autopay to pay off the card in full every month. That way you'll build the positive payment history you need without risking ending up in debt.
Avoid taking on too many new kinds of credit at once
You don't want to open tons of credit cards at once, nor should you apply for a credit card, personal loan, auto loan, and any other loan all at once. Doing so will only hurt your credit score by giving you too many inquiries. Instead, apply for one card and perhaps an auto loan if you really need a car. Pay off these creditors for a long time before you consider taking on any other kinds of debt.
Line up a cosigner in case you need one
Building credit can take time. In the meantime, you may need help getting lenders to extend financing or renting a home. If a close friend or family member with good credit is willing to cosign for you, that could enable you to get the financing you need and get into a nice apartment.
Parents and older relatives are often good cosigners. Just be aware that your cosigner is accepting legal responsibility for your debt or your rent, so don't make your cosigner regret helping you out.
Taking these steps can help you to build credit -- and to cope until your score is high enough
By opening up a student credit card or a secured card and using it responsibly, you can build a great credit score faster than you may have imagined. Start taking these steps today so you can improve your credit ASAP and so you won't have to scramble when the time comes to use that good credit score you've earned.
RELATED: See The Ascent's guide to the best credit cards for college graduates.
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