From the moment you establish your first line of credit, America's three major credit bureaus -- Equifax, Experian and TransUnion -- are tracking you. For many college students, this starts the moment they take on a student loan. Others may start with a credit card. Regardless, it's important for students to start building their credit history well before graduation -- and it's important to take it seriously, even early on.
"Your credit report and credit scores can play a part in renting an apartment, getting a cell phone and buying a car," says Rod Griffin, Experian's director of public education. "Utility companies may charge you a lower security deposit if you have good credit scores. So having good credit can save you money."
How Much Can Good Credit Save You?
Let's consider this hypothetical scenario:
Susie, Brad and Oscar all graduated from college together.
Susie secured a credit card in her freshman year. She never carried a balance, nor did she max out the card. Susie now has a credit score of 740.
Brad waited until his junior year to get a credit card, and was late paying three bills during the first few months. He paid off his balance and started paying on time and in full each month. Brad has a credit score of 690.
Your credit report carries more weight than your credit scores.
Now, each is in the market to buy a $20,000 car with a 36-month auto loan.
According to FICO, Susie would have a monthly payment of $585. Brad wouldn't be too far behind with $598. But poor Oscar would owe $713 a month.
Because of her fiscally responsible behavior, Susie will spend $1,536 less than Oscar over the course of a year, and $4,608 less overall for her car.
Your Credit Report Trumps Your Credit Score
Recent college graduates might focus on their scores (blame all those years of being graded on everything), but your credit report carries more weight than your credit scores.
To put this in perspective, Griffin likens credit reports and credit scores to homework assignments. A student is responsible for the content of her homework. Once her paper is handed in, her teacher will examine it, determine its quality, and assign a correlating letter grade. It's up to the student to improve the quality of her paper in order to receive a higher score, much like improving your reported credit history will lead to a better credit score.
Student Loans Help Build Credit History, but Mistakes Will Haunt You
"Student loans are considered installment loans, and paying these on time can help your credit score," says Shannon Ryan, CFP, wealth adviser and author of "The Heavy Purse." "Credit card debt and having several credit cards open may negatively affect your credit score," she says. "And if you've been late on payment or defaulted on a card, your scores will fall fast."
A money mistake can stay on your report for 10 years, especially if you're misusing a credit card. For recent college graduates, those 10 years could affect mortgage rates, the ability to rent an apartment and the price of car insurance.
Recent college grads -- and anyone else using plastic -- can help their credit reports and credit scores by paying off their bills in full each month and by keeping utilization rates low. "Utilization" is the ratio of a card's balance to its credit limit ("what you have borrowed" divided by "what you can borrow"). The key is to keep your balance under 30 percent of your credit limit.
Unfortunately, it isn't just landlords, banks and car dealerships that care about your credit report.
Your Credit Report Can Affect Your Job Opportunities
"Many employers are running credit reports during the interview process," Ryan says. "It's an important indicator of how you handle responsibility. In several fields, if you have a poor credit report, it will knock you out of the running for a position."
While credit reports help potential employers gauge your level of responsibility, they also serve another purpose for hiring managers.
"Credit reports are also used to help verify a person's identity by comparing it to the information provided by the employee in their application," Griffin says. "If the identifying information in the application matches that in the credit report, there's a stronger likelihood you are who you claim to be. That's important for jobs that involve high security or high risk responsibility."
Griffin also points out that a prospective employer can't run a credit report without your written consent, so always be sure to read the fine print of anything you sign during the job application process.
We should all be checking our credit reports annually (and for free) to monitor for fraud and to analyze our fiscal health. You can obtain reports from all three major credit bureaus or from a secondary site like AnnualCreditReport.com. Other ways of obtaining your credit scores often come with a fee. CreditKarma is one of the few that offers free credit scores, however, it only receives credit reports from TransUnion.
Ultimately, your credit history will affect almost every major financial decision in your life. The better your report, the more money you'll keep in your pocket.