The New Grad's Guide to Personal Finance

Credit

After setting up your bank accounts, the next step in your path to financial self-sufficiency is to build credit. This area is riddled with terminology, so let’s break that down first.

A jargon introduction

As used in the financial world, credit refers to your dependability in borrowing money. The better your credit, the more money you can borrow with the trust that you will pay it back later.

Here are a few commonly-used terms associated with credit:

Your goal: build credit.

Do this by following two rules:

More specifically, there are two mechanisms of establishing and building creditworthiness:

As each person’s financial situation is different, not everyone may be looking to take out loans after they graduate. For example, someone who lives in an urban area with high public transportation availability may not need a car. Therefore, I’ll focus on credit cards as the more universal method of building credit.

Applying for your first credit card

Assuming you currently have no open lines of credit (i.e., you have no credit history), the first step to building credit is to apply for a basic credit card that will not affect your spend habits and will allow you to build a credit history.

A good first credit card will have the following features:

I recommend the Discover It For Students credit card as it satisfies all of the requirements listed above.

Once you have your first credit card, keep it open and use it regularly for about one year before you apply for other credit cards to ensure you have a stable credit history.

Monitoring your credit score and credit report

Now that you have your first credit card, you have begun building a credit history. Furthermore, you now have a credit score that measures how dependable you are as a borrower. Your next goal should be to regularly pay off your bills in full and on time to build credit and increase your credit score.

Your credit score is affected by the following factors:

You can check your credit score with each of the three major bureaus for free once a week with these online tools:

Furthermore, each bureau will provide you one free credit report per year at AnnualCreditReport.com. Check your report for any discrepancies.

Applying for more credit cards

After you have established a stable credit history for about a year, it’s a good idea to apply for more credit cards to improve your credit history and score. As credit card utilization has a high impact on your score and total number of accounts has a medium impact, your score will go up over time.

Importantly, each credit card application will cause your score to temporarily dip by 2-5 points. However, after a few months, your score should go back up to the same or even a higher level assuming you are financially responsible.

When choosing which cards to apply for, there are a few basic questions that you should consider:

There are many credit cards out there that are targeted towards different financial audiences. However, after talking to many new grads, I almost always recommend two cards together because they can be catered to anyone’s spending habits.

The one-size-fits-most case: Chase Sapphire Preferred + Chase Freedom

If you want an outstanding value, a lucrative earning opportunity, and an ability to use points both for cash back and for travel, then this set is for you.

The Chase Sapphire Preferred is a premium travel rewards card. The highlights are:

The Chase Freedom is a great card for everyday spending that complements the Sapphire Preferred. The highlights are:

Why these points matter

You can redeem these points in one of 3 ways:

An important note: If you have the Freedom without the Sapphire Preferred, you can only redeem for cash back.

The spending categories for the two cards complement each other, so they’re a pratical, easy-to-use “starter kit” for people getting into the world of credit cards.

If you strongly prefer cash back: Chase Freedom + Citi Double Cash

If you prefer simplicity and are strongly opinionated about getting cash back explicitly, then this set is a great place to start.

The Chase Freedom is actually a great cash back card in its own right. Again, the highlights are:

The Citi Double Cash is a solid card for everyday use that earns a uniform 2% rate on all purchases. The highlights are:

Summary

Next step: invest your money.