How to Build Credit: A Guide for College Students and Recent Graduates

Credit cards are payment systems that create a debt that you are then obligated to pay later. In the United States, credit card usage is widespread, which may surprise you if you’re coming from a low-usage credit card culture. However, card usage is so common in the U.S. that 82% of Americans have a credit card.1 As you build your finances during and after college, you’ll find that responsible use of credit cards may help you build up your credit history.

How to get a credit card
But how do you get a credit card as a college student, or if you’re otherwise new to credit? One way is by getting a secured card, where you deposit funds into a bank account as a guarantee against your spending on the card.2 You can also get a retail card, which allows you to spend, for example, at a specific department store or airline.2 Or you can become an authorized user, also known as an additional card member, on an established credit card holder’s account, thus drawing on their established credit history to help you build your own.3

If you’re new to the U.S., use Nova Credit to access your established credit history from select countries when applying for a new credit card in the States. 

Focus on utilization and quality
Once you’ve started building credit, there are two important things to remember. First, the way credit scores are calculated, the utilization rate — the percentage of your maximum allowable spending that you spend at any one time — of your credit cards impacts your credit score. So when you think about responsible credit card use, consider not running up your spending on the card all the way to your borrowing limit.

Second, focus on quality, not quantity, when you’re obtaining credit cards. Opening too many new accounts in a short span of time may lower your average account age, and thus could adversely affect your credit score.⁴

Protect your card number
If you’re used to using debit cards, payment systems that take money out of your bank account whenever there’s a transaction, realize that credit cards offer more safeguards against fraud than debit cards do.⁵ But you’ll still want to keep careful track of the credit card itself, just as you would your wallet, your phone, and your keys.

It can be tough to budget when you’re a college student or a recent college graduate, because there are so many demands on your income. You’re juggling your housing, health insurance, payments on your student loans and credit cards, transportation, food, and utilities. However, try to carve out a regular percentage of your paycheck for savings and investing. To do that, consider a planning system.
 
Reduce debt payments
It may be worth checking to see if converting your government-backed student loans to a private lender could result in a lower interest rate or lower monthly payments. Whether it’s worth it typically depends on two things: your loan’s interest rates, and overall market conditions.
 
For example, when the Federal Reserve raises its Federal Funds Rate, interest rates tend to increase. But in situations when the Fed lowers its rates, interest rates tend to fall as well.⁶  

If you choose to go this route, make sure it’s a financially good fit for you — and bear in mind that you might be trading off protections such as loan forgiveness.⁷
 
Once you have your debt obligations defined, you can make a budget. This type of planning may help you build credit and de-stress. One popular rule of thumb is to spend 50% of your income on necessities and 30% on your lifestyle, while using 20% of your income to pay down your debts, save, and invest. In a high-cost-of-living area, those can be tough guidelines to adhere to, but it’s a least a framework for thinking about budgeting.
 
Think about future finances and beyond
When you have your savings target defined, set up automatic transfers from your checking account to a savings account to make savings as painless as possible. 
 
If your work offers a 401(k) plan, that can allow you to save for retirement in a tax-deferred way. 
 
Some employers also offer matching contributions to employee savings; that’s a benefit to take advantage of, if you can. If you are a self-employed gig worker, look into a Solo 401(k) plan. In addition, you can consider an Individual Retirement Arrangement (IRA). This retirement guide can help you understand the differences between the various types of retirement savings plans. 
 
Finally, don’t forget to invest in yourself beyond finances. Take care of your body physically by eating and sleeping well, and take care of your mental and spiritual health by connecting with friends and your community. Consider your education to be life-long, and stay on top of research and developments in your field.