For some background, I am in my early 20's about to graduate college. I have steady full-time employment that allows me to live within my means while building my savings. Right now, an emergency fund is my primary savings goal, since this is the first long term real-world employment I've had.

The only potential issue that I see is that my credit history is very shallow. I have a Macy's credit card that I seldom use, which barely affects my credit score. I've never waited more than a couple days to fully pay off the card.

My question is, how heavily should I prioritize building credit for post-graduation life? I don't have bad credit, but I also haven't made done much to bolster it. I would consider myself responsible with money, but then again most people would. Is getting a credit card a wise financial decision? Are there any other options for building credit that would be more preferable to someone in my situation?

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    What you're doing is already on the right track - it's frustrating, but it takes 5-7 years of doing it to really have a good 'history'. Also, if you have any student loans they'll be factored in as well (just don't miss any payments). – David Rice Jun 5 '19 at 15:30
  • A country tag would be very useful. Most of the currently given answers are extremely US-centric. For example, in many EU countries they wouldn't make any sense. – mastov Jul 2 '19 at 13:06

Is getting a credit card a wise financial decision?


I like my credit cards (plural!) because they offer much better fraud protection than does a debit card. For example, if someone gets my card number, CVV, etc and makes a large charge, I call the bank, have them send us new cards (with different numbers) and go about life while the bank decides if it was really fraud. During that time, I pay for all charges except the fraudulent ones.

If OTOH fraudsters had done the same with my debit card, I'd be out of the money until such time as they decided to return it to me.

My question is, how heavily should I prioritize building credit for post-graduation life?

This question really puzzles me. I mean REALLY puzzles me, because it seems to imply that you should stop building your e-fund and not pay off your CC every month. That's beyond silly.

So... use the CC for the same responsible purchases you would have made with your DC, and then pay it off every month.

You won't be accumulating debt, will continue to grow your e-fund and The Powers That Be will see that you are a fiscally responsible individual.

Everybody wins, and it'll make your life much easier when you want to buy a new car, get a mortgage, rent an apartment or get a job where they do a credit check, etc.

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    I would add that in general keep utilization, which is part of the formula used for credit scores, below 20% even if you pay it off every month. In other words, if you have a $10k limit then don't have more than $2k when the statement period closes. Also don't pay it off before the closing date, but you can make an early partial payment to bring the balance to below 20%. – topshot Jun 5 '19 at 13:42
  • Also, you can still have a good credit score while paying your credit cards in full every month. Indeed, you might have a better score :-) The only time I have not paid the balance due was before the advent of on-line banking, when I was stuck in Britain during a postal strike. – jamesqf Jun 5 '19 at 17:17
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    This is the right answer imo. I have never paid any interest on any credit cards I own and have still been able to build my credit score. Also, I'm surprised nobody mentioned the rewards most cards have. Almost every CC I have has no annual fee and gives me points back for purchases, sometimes up to 2-3% on purchases. This is a bonus you won't see paying in cash or with a debit card. – rickjerrity Jun 5 '19 at 21:57
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    @rickjerrity I wish I had been as smart as you. When I got my first credit card I was well aware of how dangerous credit can be, but I still managed to overspend. I underestimated how long it can take to pay back credit. Now I keep a strict, cent-accurate budget and record every purchase and my life is WAY easier. Unfortunately my early mistakes mean I'll be paying off loans for another couple of years before I can properly start saving... :( Oh well, live and learn. – Clonkex Jun 6 '19 at 6:01
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    "how many banks actually have that money to lend?" Sorry to be blunt, but this tells me you really don't understand how ALM or asset reserve requirements work. To answer your question, "all of them." – dwizum Jun 6 '19 at 13:15

The financial media, who are paid by car and credit companies, will tell you that building a credit score is of the utmost importance. Why would you believe otherwise? They will tell you to take out loans and pay interest with the sole purpose and intent of building credit.

If your goals are to drive a fanciest possible car and live in the fanciest possible home in relation to your income for part of your life then you would do well to follow their advice. Get the best credit you can, put the minimum down, make your purchase pledging future income for the things you desire now. In many cases this "house of cards" collapses and we have the woeful state of most people's retirement savings.

However, since you are asking the question, I feel your goal is different. If that goal is to build wealth and live a financially peaceful life then credit score matters very little. Provided you have a good to great credit score most reasonable things are within your reach. You can obtain such a credit score by simply paying your bills on time, like you are already doing.

Cars should be bought with cash rather than on time as the financial media tells us. No need for a credit score there. (Someone will comment how they have a 0% auto loan, whatever. Its unlikely, and even if possible, the arbitrage game for a couple of percentage points is not worth your time or effort.) Insurance, employment, and renting may take credit score into consideration. However, good credit is good enough. These organizations only penalize poor credit.

Most people do not choose to pay cash for a house, and thus a mortgage is probably in your future. Again, good is good enough and typically qualifies for the best rate. Income and down payment are far more important in obtaining a mortgage.

Its very important to realize that credit score is not an indication of wealth. The suggestion, from the media, is otherwise.

It is best to build savings and investments rather than focusing on building a credit score. Most people misuse credit, especially in their younger years, and will spend time and income digging themselves out of a painful situation. You would do well to never fall into that trap.

Warren Buffett was attracted to companies that avoided various "institutional imperatives". The notion that one must build a credit score can be classified as a personal imperative.

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    "It is best to build savings and investments rather than focusing on building a credit score." As if you can't do both by paying off your CC every month. – RonJohn Jun 5 '19 at 13:21
  • @RonJohn its about focus. So many are wrongly focused on building credit score, when they can just do so "organically" buy paying bills. I love my Fidelity CC that gives me 2% if I deposit into my Fidelity account. Sure I can get more cash back else where, but it is so hassle free and the primary purpose is to build my taxable account. I don't think we disagree. – Pete B. Jun 5 '19 at 14:35
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    "good is good enough and typically qualifies for the best rate." I disagree. Good in FICO world is 670-739, even with 25% down payment the best rates are reserved for those with very good or higher (740+) credit scores. The lower the down-payment the more valuable an excellent credit score becomes in home-buying. – Hart CO Jun 5 '19 at 15:57
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    @Hart CO: Yeah, but the problem is that by the time you get a REALLY good credit score - say over 825 - you don't need to borrow :-( – jamesqf Jun 5 '19 at 17:19
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    Excellent answer. CC isn't bad if you pay it off every month; the advantages over a debit card are all mentioned in the various answers. The idea of "building a credit score" through debt is a nefarious scheme by the lenders and credit-score companies working together. – Andrew Lazarus Jun 5 '19 at 21:44

You asked a few questions in your last paragraph. Let's take a step back before answering them, to understand the context.

Essentially, a credit score is an number that's used to predict a consumer's chance of default within the near future. As such, it's used by financial institutions (and sometimes other entities, i.e. employers, service providers, etc) as one of many factors that shape your relationship with them - for instance, whether or not you'll get a loan, but also the interest rate on the loan and potentially the features they require on the loan (i.e. if you have a bad credit score and you're applying for a mortgage, you may be required to carry personal mortgage insurance. Or if you're applying for a credit card, you may be required to secure it with a cash deposit.)

So: Before anyone can answer, for you, if a credit score is important or not, you need to have an idea for how you plan on using credit in the future. If you expect to need a mortgage, or a car loan, it can be helpful to have a good score at the time when you apply for the credit. Of course, it can be hard to plan or predict this 100% accurately, so in general, it's typical advice to understand how scores work and do your best to maintain a good credit score even if you currently have no plans to use credit.

And while it's easy to google and find advice about how to improve your score, it's important to not loose sight of the context: credit scores are meant to be a reflection of your behaviors. If you have good financial habits and are using credit, then, over time, you will have a good credit score, naturally. There will be games you can play to increase it, but in the end, if you're going to participate in the credit economy, it's more meaningful (both for you and for the creditors) if you focus on having good habits versus focusing on getting a certain score.

The good news is, it doesn't inherently cost you anything to keep track of your credit score and make sure it stays reasonably high - and there's really no reason not to do that, even if your goal is to pay cash for "everything" and never use credit. In other words, it doesn't hurt to have a good score, while having a bad score can definitely hurt. Unfortunately, some people take a "just pay cash for everything and it won't matter" approach, which to me, seems a little disingenuous - not everyone wants to pay cash for everything or plan every life situation ahead of time, and glossing over how credit scores work and their importance if you want credit by telling everyone to pay for things in cash misses the point for those people.

To illustrate an example, imagine you're applying for a mortgage The lender will consider many factors in approving you - credit score will be one of them, but typically in terms of the yes/no approval decision, credit score will be less important than income, total debt, and other factors. The credit score requirement to get the mortgage will usually be low, such as 620. So, on the surface, it may not seem important to have a really good score, and it may seem reasonable to dismiss their importance.

However, if your score is in the low 600's versus the mid or upper 700's, you may see significant cost differences - you may be required to carry a PMI policy, and you may see an interest rate difference. If you're buying a $250,000 house on a 30 year mortgage, a $100 a month PMI policy will cost you $36,000 over the life of the mortgage, and a quarter point difference (say, 4% vs 4.25%) in interest rate will cost you roughly $13,000 over the life of a mortgage. That's a difference of nearly $50,000 just because of your credit score. That's nontrivial. And it's something you could have easily avoided with some straightforward behavior changes in the months/years leading up to your mortgage application. Clearly, if you're planning on getting a mortgage, it makes sense to work on getting a high score before you apply.

Which brings us back to your questions:

My question is, how heavily should I prioritize building credit for post-graduation life?

To sum up the above: don't get completely hung up on your score, but do consider your future plans on utilizing credit to decide how much emphasis you want to place on building credit now. If you plan on needing credit within the next few years, it can make a significant impact to focus on your score now, especially since your credit history is short. If you generally have good financial behaviors and you are sure you won't need any credit any time soon, it might not matter as much to really force your score up, but it may still make sense to keep an eye on your score and start building history now anyways.

Is getting a credit card a wise financial decision?

Getting a credit card is not the important decision, really - what you do with it is important. In your situation, where the worst thing about your credit score is that you have a short history, having a credit card is a typical way that people work towards establishing a longer credit history, mainly because cards are a convenient credit tool that's not inherently tied to any specific purpose and which has no inherent cost since you can pay it off and avoid interest completely.

You can get, and use, a credit card without changing your lifestyle or budget, and it can be a great tool not only for improving your credit score, but also for your overall financial health - for instance, if you get and use a card with a good rewards program, putting all your regular expenses through it can net you some extra income.

Are there any other options for building credit that would be more preferable to someone in my situation?

Not really - which is why credit cards are a popular tool. Get the credit card, use it for purchases you've already budgeted for (not impulse buys!), and pay it off immediately. Your score will creep up, you'll be in a better position if or when you need credit.

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    Exactly. Planning on buying new tires with the $800 cash that you've been diligently saving? Go ahead, but charge the tires and then pay off that charge with the $800 cash you saved. Two goals have thus been accomplished: you (indirectly) paid for the tires with cash, and the credit bureau thinks you're good at paying your bills. – RonJohn Jun 5 '19 at 15:30
  • Haha I've actually been budgeting out a new set of tires. Thank you very much for the insight, everyone. – GotCubes Jun 5 '19 at 15:57

My question is, how heavily should I prioritize building credit for post-graduation life?

It's not much effort. Research the card that has no annual fee and the best perks to suit your lifestyle. Use one or two of the online services (Credit Sesame, Credit Karma, etc) to check your score, and then apply for the card you choose. Use the card, but pay in full. Over time, you might want to add another card or two as each may have different perks. e.g. A Target branded card might give you 5% back on store purchases, as does an Amazon card. Amex (for me) has the perk of early Theater/Concert tickets. You don't want to carry a balance, ever, and might only keep 2 in your wallet. There's always the risk that a card gets turned off due to fraud, so you'll want a backup. Worst case, your debit card, or a wad of cash. But I wouldn't go far without 2 potential payment methods.

The largest benefit of good credit is the lower rate on a mortgage, if only for the fact that it's such a high loan that even 1/2% difference in rate multiplies up over the term of the loan. Keep in mind, banks are happy to sell you the rope to hang yourself. Credit cards, and the credit process itself, isn't inherently good or bad, it's how you use it. A Money Magazine article states that "Only 35% of credit card users don’t carry a balance–they pay off their bill every month, like you’re supposed to." The good news? As an upcoming graduate, you are already above average. I share that data as it's important to be aware of the risks, the circle of just making minimum payments in the hope that future raises will somehow get you out of that cycle.

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Even if you don't plan on borrowing a good credit score helps. I have coached a number of people trying to rent apartments. Those with poor credit scores find it much more difficult as the landlords pull the credit score and see it as indicating more trouble collecting rent.

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Just to complement @Pete B answer.

Building credit score should be the last thing for any freshman from the college. Contradict to many "financial expert" advise, paying off credit card purchase ASAP is an important discipline to get a credit in future.

As financial company moving away from simple heuristic towards using machine learning to discover bad borrower(that will declare bankruptcy ), early payment discipline is indeed on your side.

Some financial adviser may confidently speaking of building credit score that they have no knowledge about (mostly by mixing up credit card utilisation and payment records), while even the financial sector banker don't have a clue how the loan heuristic and machine learning works.

Take a copy of Daniel Kahneman books 'Thinking, Fast and Slow' and read it thoroughly. It is more useful than many "get rich(debts) quick" advice.

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    "Contradict to many "financial expert" advise, paying off credit card purchase ASAP..." What financial experts suggest not paying off credit cards to build credit score? I've never seen anyone suggest that. – Hart CO Jun 5 '19 at 16:07
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    @mootmoot Those all look familiar, and none of them suggest not paying off your credit card. There's a difference between utilization at statement close and carrying a balance. Were you meaning that it's important to pay off purchases before statement cycles even end? If so, why? – Hart CO Jun 5 '19 at 16:34
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    @GotCubes - the ideal utilization from a credit score perspective is very low but nonzero. Banks like to see that you use it, but they really don't want to see that it's always maxed out. Paying quick enough to avoid interest should be the most important thing from a consumer's perspective. – dwizum Jun 5 '19 at 19:48
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    @KaiQing I'm pretty certain you'd have had the same score improvement with a year of on-time payments if you paid it off every month. I've never seen anything that suggests paying interest on a credit card helps your score. – Hart CO Jun 7 '19 at 0:45
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    @KaiQing: Was your loan officer a fiduciary? I'm sure not, because his advice didn't help you at all and made a nice profit for the company he represents. – Ben Voigt Jun 7 '19 at 2:46

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