College Life

Dealing with Money and Credit After Leaving Home

Money and Credit

The transition from college to the real world is an exciting adventure. You’re likely kicking off your career, earning your first steady paycheck and basking in the self-sufficiency of being financially independent. That said, adulthood comes with a lot of responsibilities too. Here’s a few things every college grad should tackle.

Prioritize what matters, financially.

While your friends might be buying new cars and taking out giant mortgages, your 20’s aren’t for living in luxury. The wiser move is saving and investing, rather than taking on new debt. Here’s a few things that should come before you swear off the ramen noodles forever:

  • Emergency Fund. Strive to have at least 3 months of living expenses saved up in case of surprise medical expenses or a job loss. That could mean sacrificing your morning Starbucks run until you’ve saved up some capital, but remember, it’s only temporary.
  • 401(K) Retirement Plan. Wait until you’re 30 to start investing and you’ll need to save 2-5 times as much to build the same wealth as if you started at 22. A 401(k) is a good option and your employer may offer contribution matching. If they do, be sure to meet those dollar amounts. After all, it’s free money!
  • Health Insurance. Unexpected health costs can drain your bank account. That’s why it’s important you don’t skimp on coverage. While you’re at it, stay on top of your auto insurance too; you’ll end up paying more in the long run if you let it lapse.

Planning for the future often means cutting back now, so stick to your budget and continue living modestly. If you do decide to treat yourself, make sure it’s on life experiences that are worthwhile.

Know what factors into your credit score.

Before we dive into building a good score, it’s important to know what goes into it. Your credit score is a 3-digit number, from 300 to 850, calculated using a mathematic algorithm from the information in your credit report. It indicates your level of risk that you may default on financial obligations. Banks, insurance providers and other financial institutions use this information to determine the rates you receive.

There are 5 categories that make up your score.

  • Payment history. 35% is determined by your account payment information, including any delinquencies.
  • Amounts owed. 30% depends on how much you owe on your accounts, for instance, the amount of available credit used on revolving accounts.
  • Length of credit history. 15% of your score is reflected by how long ago you opened your accounts. Hint: as long as you’re still using them, the longer, the better!
  • Types of credit used. 10% relies on the mix of credit you have, including revolving, like credit cards, and installments, like student loans.
  • New credit. 10% depends on pursuing new credit, including recently opened accounts and even inquiries.

There are 3 major credit bureaus, Experian, Equifax and TransUnion. You can request a free copy of each report once per year at AnnualCreditReport.com or by calling toll free at 1-877-322-8228.

Be patient when building your credit.

Once you’ve checked your score, it’s time to implement some best practices. There’s a few things you can do to improve your score, whether you have good, bad or no credit.
  • Set up automatic payments. Remember that 35% of your score depends on payment history, so it’s crucial to pay every bill on time, and in full.
  • Get a credit card. For those with good credit, a rewards card is the way to go if you qualify. You’ll get cash back or other benefits on purchases you’d make anyways, like gas and groceries. If your score is on the low end (below 619), you may have to start out with a secured credit card. They require a cash deposit, like a debit card. By making on-time payments, it helps you establish credit history and improve your score. For either option, avoid interest charges by only spending what you have in the bank and paying your credit card balance in full each month.
  • Don’t over-apply. When you apply for a loan or credit card, it’s considered an inquiry. This slightly lowers your score, so try to limit it to twice a year. However, once your score is pulled, you have 30 days to do other inquiries without it counting against you.
  • Check your score. Continue to check up on your credit score annually to make sure it’s trending in the right direction.
  • Handle your debt. Unless you have a mortgage, your student loans are likely your biggest form of debt. If your minimum payments are out of hand and you’re at risk of missing a payment, student loan consolidation can give your budget some breathing room, and potentially even lower your rate.
It’s also a good idea to pick up a book or two on money basics. Our favorites are The Total Money Makeover by Dave Ramsey, Your Money or Your Life by Vicki Robin and The Money Book for the Young, Fabulous & Broke by Suze Orman.
 

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