Not fully understanding the intimate link between spending habits and debt, new college grads fail to learn how to establish credit and run the risk of ruining it.
The worst part is they may not even necessarily know they’re doing it (or how)… until it’s too late.
The risk mostly comes down to spending patterns. Get into good ones early, and your credit will improve with time. But make bad spending choices, and you can create problems that will follow you for years.
Here’s how to make the kinds of spending choices that will help new college grads avoid ruining their credit.
Related: The Seven Habits of Wealth
1. Avoid Giving into the Temptation of “Making Up for Lost Time”
By the time you graduate from college, you’re coming off of four (or more) years of living on a shoestring. Even if you enjoy your years in college, it’s likely that you gave up a lot of creature comforts of life along the way. So you might be in a hurry to make up for lost time once you get out.
This could be one of the worst moves possible.
For example, you might reward yourself with a vacation to a tropical island paradise. You might start replacing various gadgets in your life, trading up to higher models of a smart phone, laptop, and entertainment equipment. You might also treat yourself to a new wardrobe.
If you get a decent paying job right out of the gate, you might adopt a lavish lifestyle. This could include dinners in expensive restaurants or simply buying the daily latte (or two).
There’ll be a time for all of that, but at least try to spread it out.
You don’t have to start spending loads of money as soon as you get your first paycheck. Replace your equipment only when the old stuff breaks. Purchase a new wardrobe gradually. And while you might want to take a vacation after school ends, put it off for a year or two… especially if the destination is expensive and money is tight.
You have a lifetime to indulge yourself, and there’s no need to fast-forward the process. That will only get you into financial trouble in a big hurry.
2. Learn the Virtues of Buying “Gently Used”
Money goes a lot farther when you learn to avoid buying new. Instead, buy what you need used… as in gently used. And there are plenty of ways to find exactly that.
One workaround on buying a new wardrobe is shopping in thrift stores. You can find shirts, blouses, and slacks that would retail for $40 or $50 for only four or five dollars.
It’s even possible that you can find brand-new items in a thrift store. People literally buy brand-new clothing, never wear it, and then drop it off as a donation. It’s an excellent way to start rebuilding your wardrobe after college.
If the idea of thrift stores isn’t your cup of tea, look into consignment shops (there are also a ton on eBay). Here, you’ll find high end, designer, and pricey articles for a fraction of the retail price. Other options include online secondhand clothing stores like ThredUp and Swap.com. Both offer gently used, name brand clothing at steep discounts.
Buying secondhand will be especially important if you get an apartment shortly after graduation and need to furnish it. Yes, you will need a certain amount of furniture, but you certainly don’t need brand-new furniture.
People move all the time, and when they do, they often put their furniture up for sale. You can find these sales on Craigslist or even on the bulletin board at work. You can get some decent furniture for only pennies on the dollar.
That will tide you over until you’re in a position to afford to gradually replace the used furniture with new stuff.
3. Keep the Credit Cards for Emergencies Only
One of the biggest reasons new college grads ruin their credit is by buying all of the above and using credit to pay the bill.
If you are already dealing with large student loan debts, adding credit card debt to the list could be the step that pushes you into early insolvency. I saw this pattern again and again when I was in the mortgage business.
It’s good to have credit cards. You need to start building a strong credit profile and credit score early. And since you’re probably short on cash savings, credit lines could serve as a preliminary source of emergency funds.
But that’s emergency, in the sense of a job loss or paying a large medical deductible. It doesn’t include vacations, a new sofa, or an expensive dinner at the newest restaurant in town. It also doesn’t cover that annual car registration payment that you forgot to budget for.
Very conservative use of credit cards early on is one of the best ways to avoid ruining your credit. Get in too deep too early, and you may find yourself unable to make your credit card payments. That’s when credit problems begin, and that’s a very difficult hole to climb out of later. Make sure the credit card you choose has no annual fee, a modest interest rate, and a good rewards program to help you save on the purchases you need to make (gas, groceries, utilities).
4. A Car Payment Too Early Could Seal Your Fate
Unless you live in a big city, you will probably need a car. But that doesn’t mean you need a new car.
More specifically, you don’t need the big, fat monthly payment that comes with a new car. And you certainly don’t need the rapid-fire depreciation that’s virtually guaranteed if you buy a new car.
Early on in your career, you can do just fine with a decent, used car. After all, the average price of a new car is now at a record high $34,077. If you borrow $30,000 to buy a new car, on a five year loan at 3%, you’d be looking at a monthly payment of $539.
If you have to pay rent and a student loan payment, that can be a tight stretch.
If, by contrast, you were to purchase a used car and borrow only $10,000, the monthly payment on a five-year loan would be just $180. Better yet, if you can buy a “beater”–as in the most car you could afford to pay cash for–you’ll have no monthly payment at all.
Granted, a brand-new car would be better for your image. But a used car, particularly one without payment, would be a heck of a lot better for your bank account.
5. Start Saving and Investing Early
Savings are an often overlooked component of the credit picture. Simply put, people who begin to save and invest money early are less dependent on credit than people who have no savings or investments at all.
And if you have savings available, you’re a lot less likely to incur the credit score-destroying late payments that afflict the perpetually broke. Start saving money as soon as you get your first job, even if it’s only a little bit. The biggest obstacle to saving and investing is just getting started. A small amount will enable you to do at least that much.
Set up a payroll savings plan to have money put into a savings account on a regular basis. Begin participating in your employer’s 401(k) plan with your first paycheck. A 3% allocation shouldn’t hurt you, not the least of which since the contribution will be tax-deductible. And if your employer offers a matching contribution, it will be like getting free money.
The big advantage to saving and investing money is that eventually you become self-funding. You won’t need to rely on credit because you’ll have the cash that you need. But the only way to get there is to start as soon as possible.
Saving money really is a habit. The sooner you adopt it, the better off your entire financial picture will be.
Credit problems usually start early in life. But so does financial strength. If you’re a new college grad, you’re making the choices that will decide your financial future right now.