June graduates' strange new world

By Scott Reeves

updated 1:35 p.m. ET May 14, 2006

NEW YORK - June graduates are about to enter a strange realm where their credit score is more important than their grade point average.

It's called the real world, kids.

"The biggest mistake college graduates make is failing to understand that what they do now has a huge impact on their financial future," says Bridget Smith, editor of LendingTree.com's Knowledge Center, based in Charlotte, N.C. "This includes the use of credit, overspending and failure to start a savings plan."

Your pay stub will tell you how much money you've got coming in each month, but unless you know how much you're spending and what you're spending it on, your income may never quite catch up to spending. Avoid that trap by drafting a budget and sticking with it. (See "Living Debt-Free.")

The key to successful budgeting is looking ahead to what you plan to spend, rather than just reviewing what you've already spent. To do this, break expenses into three main categories: needs, wants and dreams.

Many people don't understand the difference between needs and wants, as evidenced by the crushing credit-card debt many people carry. Needs are basic things, including rent, car payments, insurance, utilities, food and monthly installments on your student loan. (See "Avoiding Sticker Shock.") Such items should be taken off the top of your take-home pay each month to determine what you have left over for wants.

10 financial tips for graduates Click on the links for a full description: First, pay yourself Learn the wonders of compounding Open an IRA Learn to make trade-offs Snap up free money Balance short- and long-term goals Invest for long-term growth Plan for unexpected expenses Pay off credit cards Buy needed insurance

When you have a real job, you'll have to budget for clothes, especially fancy duds for work; grungy jeans will no longer cut it. You'll also need to set aside money for routine car maintenance or major repairs on an old clunker. File those items under "needs" as well.

Things you want but clearly don't need to survive each month include going to the movies or a ball game, eating out or buying a new camera or TV. Dreams include vacation travel, gifts and holiday spending.

If your take-home pay is $3,000 per month, and if rent, utilities and other basic expenses consume $1,200, you have $1,800 left each month for wants, savings and those things you dream about.

Establishing credit and using it wisely separates the perpetual undergraduates from the adults. First, a credit card isn't free money. Think of it as an unsecured loan from the bank that allows you to buy now and pay later. If you're smart, you'll pay the bill in full each month, using the bank's money interest-free and building a solid credit history. (See "Using Credit Wisely.")

In general, a credit score of 720 or above is excellent; 675-719 is good; 620-674 is below average; and below 620 is sub-prime, meaning you'll have a tougher time finding a lender, and you're almost certain to get socked with a higher interest rate. (See "Deciphering A Credit Report" and "Fixing Bad Credit.")

"If you've got a student loan and a credit card, you've got a credit report, and you should check it," says Smith. "You build a good credit history by paying your bills on time and not maxing out your cards. Use a credit card to help you manage your money and track what you spend, but don't use it to buy things that you couldn't otherwise afford." (See "Establishing Credit.")

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