How to Establish Credit While Young
A credit score is a three-digit number that can greatly impact your life. Just like it’s a good idea to save money while you are young, it’s also a good idea to work on building your credit score while you are young.
The right credit score can set you up to tackle many of the financial obstacles life throws your way. Let’s dive into how to establish credit while young.
Challenges of Building Credit When Young
When you want to build credit, starting at a young age is a smart move. But you’ll encounter some challenges along the way.
The biggest challenge of building credit from scratch is that you likely don’t have any credit to start with. With no credit accounts to your name, it can be difficult to convince a lender to provide you with a credit account in the first place.
Although building credit from scratch is a challenge, it is definitely possible. The sooner you start implementing smart credit-building strategies, the better off your credit score will be.
Importance of Building Credit While Young
If you are just starting out, then a credit score might not seem too important. After all, the three-digit number can seem a little bit nebulous if you haven’t needed it yet.
But at some point, you will need a credit score. And a good credit score can help you in more ways than you realize. But unfortunately, if you wait until you absolutely need a good credit score, it might be too late to build the score you need.
That’s why it’s important to start building up your credit score as soon as possible. When it’s time to put your credit score to good use, you’ll be happy you put in the effort.
One of the many ways that a credit score can impact your life is by limiting your housing options.
If you want to buy a house with credit, you’ll need a credit score. That’s a non-negotiable. Not only will you need a credit score, but you’ll usually need a good credit score to obtain a mortgage loan. Most lenders require a credit score of at least 620 to grant a mortgage. But a better credit score can help you unlock a better interest rate.
Even a seemingly small change to your interest rate can have a big impact on your long-term finances. For example, let’s say you take out a $200,000 30-year fixed-rate mortgage with a 6% interest rate. You’d pay $231,676.38 in interest payments over the life of the loan. But if you had a higher credit score, you might be able to tap into a 5% interest rate. With that small change, you’d only pay $186,511.57 over the life of the loan. That’s a savings of over $45,000.
So, it’s clear that a good credit score can help you unlock savings for a home purchase. But what if you plan on renting?
At first glance, you might think that renters don’t need to worry about having a good credit score. However, most landlords will check your credit score. If you want to land your dream apartment, you’ll likely need a good credit score to make that happen.
A vehicle is a necessary expense for most of us. Although it may be ideal to pay cash for a vehicle, the reality of sky-high car prices makes that impossible for most. So, many drivers must turn to auto loans to buy a car.
If you are applying for an auto loan, a good credit score will help you unlock better interest rates and terms. The right credit score could help you save thousands on your auto loan.
Setting Up Utility Accounts
Utility companies and cell phone providers often run a credit check before establishing your service. Although a bad credit score won’t preclude you from service, the company might require a bigger upfront deposit for those with a bad credit score.
In some cases, a good credit score could help you avoid making any kind of deposit at all.
Save on Insurance Costs
Depending on your situation, your insurance needs will vary. But you’ll likely at least need car insurance for your vehicle. When shopping around for the best price, a good credit score can help you unlock better rates.
Typically, a better credit score leads to lower insurance costs.
Tap Into Rewards
Although you might be able to sign up for a secured credit card without a credit score, you likely won’t find many with rewards. If you are already swiping your credit card, it would be nice to get some rewards for that purchase.
With a good credit score, you can unlock premium rewards credit cards that can help you stretch your dollars further.
Mistakes to Avoid While Building Credit
Whether or not you are starting young, there are some key mistakes to avoid while building credit. Here’s what you shouldn’t do if you are trying to build credit from a young age.
Not Checking Your Credit Report
A credit report is a record of your credit accounts and credit history. Lenders report your payments and other details about your credit accounts to the credit bureaus. This information is the basis for your credit score.
But everyone makes mistakes, and lenders aren’t any different. In some cases, a mistake will make it onto your credit report. The mistake will likely drag down your credit score. So, it’s important to regularly check your credit report for mistakes and fix the errors.
If you spot a mistake, file claims with the credit bureaus to have it removed. It’s a good idea to check your credit report at least once per year.
Missing a Payment
A solid payment history is a key feature of a good credit score. Since your payment history represents 35% of your credit score, even a few missed payments can really impact your credit score.
If you want to build good credit, avoid any missed payments. It can be easier said than done to remember your payment due dates. So, one way to avoid a missed payment is by setting up an automatic payment solution. Most bill providers offer an auto payment option to avoid any missed payments.
Sometimes, a missed payment is the result of a cash crunch instead of a forgotten due date. If you anticipate missing a payment, then reach out to the provider as soon as possible.
It’s surprising, but many creditors are willing to work with customers facing payment difficulties. In some cases, the provider may grant a temporary reprieve or adjust the payment deadline to suit your budget.
Applying for Too Many Credit Accounts
When you apply for a credit account, the potential lender will run a hard credit check. When that happens, a credit inquiry will register on your credit report.
New credit inquiries account for 10% of your FICO score. If you make too many credit inquiries within a short period of time, that can drag your credit score down.
Carrying a Credit Card Balance
When you carry a credit card balance, it can get expensive quickly. With the average credit card interest rate sitting above 16%, you could get stuck paying tons of interest on any balance you carry.
Beyond the cost of credit card debt, a credit card balance impacts your credit utilization ratio. Your utilization ratio compares the amount of credit you are using to your revolving credit limits.
For example, let’s say that you have a credit card limit of $10,000. If you have a balance of $4,500, then your utilization ratio would be 45%. Most experts recommend keeping your credit utilization ratio at less than 30%. Since credit utilization accounts for 30% of your FICO score, it’s very important to keep an eye on this number.
How to Establish Credit When You Are Young
It’s clear that establishing credit when you are young is very important. But how can you accomplish this major financial goal? Here are the steps you can take to build credit now.
Check Your Credit Report
The information on your credit report is the basis of your credit score. Generally, the information on your credit report dates back around seven to ten years. It includes everything from your payment record to inquiries made for new credit.
If a mistake makes its way onto your credit report, it will likely drag your credit score down. The sooner you catch a mistake, the better off your credit score will be. With that, it’s a good idea to check your credit report on an annual basis.
The good news is you can tackle this financial to-do for free from Annual Credit Report.com.
Use Credit Repair if Necessary
If you catch a mistake on your credit report, then credit repair might be necessary. Essentially, credit repair is the process of removing inaccurate information from your credit report.
You can choose a DIY credit repair approach. In this case, you would contact the credit bureaus with information to dispute the mistake. If successful, the credit bureau will remove the negative information.
But if you have a lot of mistakes on your credit report, then enlisting the help of a reputable credit repair service might be the better option.
Open a Secured Credit Card
A secured credit card requires an upfront security deposit. In most cases, the security deposit will become your credit limit. The security deposit makes this type of credit card easier to obtain than other cards. That’s because if you miss a payment, the issuer will simply use your security deposit to cover the purchases.
Although a secured card isn’t an ideal credit card, it is a great opportunity for anyone looking to build credit. It’s essentially like a credit card with some training wheels attached in the form of a security deposit.
If you don’t have the funds for a secured credit card, there may be another option for students. Many student credit cards have limited eligibility criteria. With that, it’s usually easy to sign up for a student credit card to start building credit. But you’ll need to be in school to qualify for these types of cards.
Try a Credit-builder Loan
A credit-builder loan is an opportunity for those with no credit to build credit and savings at the same time. Unlike a traditional loan, you won’t receive any funds upfront when you take out the loan. Instead, you’ll immediately start making payments to the lender.
With each payment, the lender will tuck the principal amount away into a special savings account or certificate of deposit. Each month, the lender will report your payment to the credit bureaus. At the end of the loan term, you’ll receive your principal amount as a lump sum payment.
Ultimately, a credit-builder loan is a good opportunity for young people to build both credit history and savings. But it will only help your credit score if you can keep up with the monthly payments.
Get Credit for Alternative Payments
Alternative payments are bills you pay that aren’t tied to a credit account. If you are already making these alternative payments on time, getting credit for them could improve your score.
A few types of alternative credit payments include rent, utility bills, cell phone bills, and streaming subscription services. It’s possible to get credit for these types of payments through a service like Experian Boost. Depending on your payment history, this could be a solid place to start building your credit.
Become an Authorized User
When you become an authorized user, you are added to someone else’s credit card. In some cases, being added as an authorized user may have a positive impact. That’s more likely to be true when the credit card account has been responsibly used.
When you are young, a family member or friend might be willing to add you as an authorized user to help you build credit. If you have someone that’s willing to add you as an authorized user to their credit account in good standing, that could help you establish a credit history.
But if you don’t have that connection, there’s another option.
Add Credit Tradelines
If you don’t have someone who can add you as an authorized user, consider purchasing a credit tradeline. When you purchase a credit tradeline, you’ll be added as an authorized user to a credit card account in good standing, and the history of the account will appear in your credit file.
Want to give this opportunity a try? Here’s where you can find out more information.
The Bottom Line
Establishing credit while you are young is a good move. If you build credit now, that established history of responsible credit usage will come in handy when you need to rely on it. Whether you want to rent a nice apartment or save on insurance costs, having a good credit score can come in handy even if you aren’t planning on applying for a major loan anytime soon.
Take action to start building your credit today!