Why Good Credit Is Important for Recent Graduates

Now that college is behind you and it’s time to start living in “the real world,” it’s a good idea to take a look at your credit situation. If you’re like many young people today, your credit report may include student loans, credit card balances and even car loans. How you’ve handled debt so far could affect several areas of your life going forward—including some you may not have thought of.

Potential Employers May Ask for A Credit Check

If you’re job hunting and your potential employer asks for a credit check, don’t be surprised. A 2012 Society for Human Resource Management report found that 34 percent of the organizations surveyed conduct background checks on some employees; 13 percent conduct them on all.1 Some companies do a credit check to get a handle on who you are as a borrower, and how responsible you are when it comes to meeting payment deadlines and managing your credit. Yet while employers can request information from credit reporting agencies, they won’t see your actual credit score.2 Still, it’s a good idea to review your credit report to see what your new boss may find. Some card companies even allow you to check your credit score for free.

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Your Rental Application May Depend on a Credit Check

Ready to move out of student housing and into your first real, grown-up apartment? Be prepared: Your rental application may include a credit check request. Landlords may use a consumer report to evaluate the rental applications of potential tenants, and the most common type of consumer report is a report from a credit reporting agency, according to the Federal Trade Commission.3

Landlords who choose to check your credit as part of your rental application must follow Fair Credit Reporting Act (FCRA) guidelines to protect your privacy. If your application is denied based on information found in your credit check, your landlord must give you an adverse action notice that includes the contact information for the credit reporting agency that provided the credit check.4

Your Credit Score Affects Your Ability to Qualify for New Loans

If you think the well-paying job you land after graduation is the key to qualifying for a new loan, you could be mistaken. In fact, even with a great job, a poor credit score may hold you back from getting that new credit card, car loan or even a mortgage for your first home. Your credit score reflects your financial behavior in a variety of areas, including your payment history and your total amount of debt.5 Lenders review your credit score as part of your borrowing application. Poor repayment history, such as partial or late payments, may damage your score and impact your ability to borrow.

By graduation, you should understand the impact of your actions on your credit score. For example, applying for multiple credit products may negatively affect your credit record since each lender “hits” your credit with an inquiry. You may also learn that as your balance-to-credit limit ratio — or the amount of debt you use relative to the amount available to you — creeps up, your credit score may suffer as this is a common indication of cash flow troubles. Missed payments, late payments and less-than-minimum payments may also contribute to a declining credit score.

A Less-Than-Stellar Score Could Scare Away Lenders

Lenders look most favorably on scores that top 800 (the max is 850), but a score between 740 to 799 indicates you’re a dependable borrower, and a score between 670 to 739 is considered good. Borrowers scoring between 580 and 669 may be approved for credit from some lenders, but approval is by no means guaranteed. Those whose scores come in below 579 are considered risky borrowers and may have trouble securing a loan.7

A poor credit score isn’t the end of the world. Responsible actions on your part can redeem your score. The key to cleaning it up: pay bills on time and in full, and don’t use too much of your available credit. Never use credit cards as a way to live beyond your means.

To help monitor your credit card balances, consider setting up credit card alerts that will notify you by email reminder or text when your balance exceeds an amount chosen by you.

Your Credit Information Impacts Your Interest Rate on New Borrowing Products

While your credit history may be good enough to qualify you for new credit, it also impacts the interest rate you’re offered. Lower credit scores suggest you may be a higher-risk borrower, and lenders who are willing to lend you money may choose to do so at a higher interest rate.

The rate you’re offered on a credit card is called the annual percentage rate, or APR. If you carry a balance, APR will be used to calculate your monthly finance charge. Monthly finance charges are calculated by converting the APR to a daily rate, then applying it to your outstanding credit card balance. Your monthly minimum payment will go to the interest charged, fees and the principal balance. Avoid interest charges by paying your bill in full. Or pay less interest by making more than your minimum payment.

For example, if you pay for a $500 item with your 14.92% APR credit card and make the $25 minimum payment monthly, it will take 24 months to pay off the balance, plus the interest of $78.48. If, however, you pay $35 monthly, it will take only 16 months to pay off the balance with an interest cost of just $53.95. Why? Because an extra $10 each month goes directly to reducing your balance, and therefore the interest amount charged monthly.

So staying on top of your credit could help you keep more money in your pocket by qualifying for lower APR offers. And paying more than the minimum monthly payment helps you pay less in interest charges overall.

Sources:

1. http://www.creditcards.com/credit-card-news/7-jobs-require-great-credit-1270.php

2. http://www.creditkarma.com/article/job-search-credit-report

3. http://www.ftc.gov/tips-advice/business-center/guidance/using-consumer-reports-what-landlords-need-know

4. http://www.ftc.gov/tips-advice/business-center/guidance/using-consumer-reports-what-landlords-need-know

5. http://www.creditkarma.com/article/late-payments-affect-credit-score

6. http://www.creditcards.com/credit-card-news/fico-credit-score-account-amounts-owed-1270.php

7. https://www.discover.com/credit-cards/free-fico-score/

Legal Disclaimer: The articles and information provided herein are for informational purposes only and are not intended as a substitute for professional advice. 

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