There’s no such thing as being too young to start building your credit score. On the contrary, starting in your 20s is a great way to set yourself up for success later on in life.
The truth is, the earlier you start, the more time you have to achieve a high score. This is important, especially considering that it takes a while to build a good credit score. But don’t worry, this article has tips to get you started. From using the right tools to always paying your bills on time, here’s what you need to know.
1. Apply for a Credit Card
A great way to start building your credit score is with a credit card. Unfortunately, it can be tricky to get approved for one without a credit history. That’s where secured credit cards come in handy.
Unlike traditional credit cards, you have to make an initial deposit to get a secured card. This deposit is typically the same amount as your credit limit and acts as a safeguard for the issuer. If for some reason you don’t make payments, what you owe will be taken from your deposit. On the other hand, by making required payments, you’ll start to build a positive credit history.
There are various types of secured credit cards, which offer different features and perks. For instance, you could find a credit builder card that works similarly but doesn’t require a minimum deposit or charge interest. Make sure you do your research before applying for a card to ensure you choose one that works for you.
2. Pay Your Bills on Time
Your credit score is determined by five key factors; payment history, credit mix, length of credit history, credit utilization, and new credit. Payment history has the biggest impact and should be your top priority. Missing a payment, or paying a bill late, can drastically lower your score. Not to mention, it causes you to amass interest charges, so you end up owing more money in the long run.
When at all possible, aim to pay off your balance in full every month. This will help you avoid costly interest charges. If you can’t make the payment in full, at least pay the minimum owed. While you’ll still acquire interest, you’ll avoid late fees and negative marks on your credit report.
Do you miss payments due to forgetfulness? Consider setting up automatic payments. You could also set up bill reminders for yourself, so you always know what’s coming up.
3. Become an Authorized User
Do you have a friend or family member you trust — and who trusts you? Consider asking to become an authorized user on their credit card. This means you’ll have access to their card, allowing you to make purchases and benefit from the primary cardholder’s credit activity. Meanwhile, the primary cardholder remains responsible for making payments on the account.
Becoming an authorized user can be beneficial to you as someone who wants to build credit. But it could potentially lead to problems for the primary cardholder, especially if you start making purchases neither of you can afford. That’s why it’s critical to come to an agreement with the primary cardholder about how often and how much you can charge.
It’s also important to note that negative actions by the primary cardholder can impact you as well. Make sure you choose someone who is financially responsible and will teach you good spending habits.
4. Be Responsible
Once you’re accepted for a credit card, whether a traditional or a secured card, make sure you’re being financially responsible. One of the biggest mistakes new cardholders make is spending beyond their means, something many Americans are guilty of.
Do your best to keep your spending in check. A good rule is to avoid charging more than you can afford to pay in full, regardless of what your credit limit is. That’s a surefire way to acquire debt and potentially put yourself in a financially difficult situation.
Keep in mind that even if you can afford to charge more, it’s a good idea to keep your balance on the lower end. Your credit utilization ratio — the percentage of credit you’re using out of the total you have available — makes up one-third of your credit score. Experts recommend keeping that ratio to no more than 30%; anything higher could damage your score.
5. Monitor Your Credit
Last but not least, make sure you get into the habit of monitoring your credit score. After all, that’s the only way you’ll really know whether your score is improving. Many credit card companies will provide consumers with their scores on their monthly statements. If your issuer does not, call your bank. Financial institutions that participate in the FICO Score Open Access program will provide that information at no charge.
There are also apps you can use to help monitor your credit score for you. These typically work by having you connect your accounts to the app. Once that’s done, the app will automatically review your information and keep you updated on your score in real time.
Not only should you check your credit score, but you should also pull your credit report. While your report doesn’t show your score, it shows everything that goes into it (credit applications, payment history, etc.) It’s important to pull your report periodically because there may be mistakes that are lowering your score. If so, make sure to dispute those mistakes with the credit bureaus immediately.
Your credit score plays a vital role in your financial well-being. A high score can make all the difference, which is why it’s a good idea to start building your credit when you’re young. The tips above are simple yet effective steps you can take today to improve your tomorrow.