Transitioning to adult life is never easy but full of opportunities, and having a decent financial foothold can give you the boost you need to get a jumpstart on your life.
Our credit makes up a considerable portion of our financial identity; it allows us to make some of the most significant financial decisions in our lives, like purchasing a house, renting an apartment, some times even finding a job.
Right now, the younger you start, the better it will be. According to Bankrate, 43% of homebuyers were millennials, and 18% were in their twenties.
Keeping this in mind, two key factors that impact young buyers’ ability to acquire a mortgage is due to insufficient Debt-to-income ratio and a low credit score.
This is why it is best to become a wise spender and build your credit now to save yourself time, money, and headaches as you make future plans.
When is the best time to build your credit?
As mentioned above, if you start building your credit as early as possible, you can set yourself up for success, especially since it takes time to build up. A true sign of you being an independent adult is when you rely on your own credit to pay for the things you need like utilities, phone plans, car loans, you name it. Depending on the state of your credit history, what you can and can’t be approved for will be affected, and the interest you’ll need to pay as well.
What it means to have bad credit vs. no credit.
By now, you’ve probably heard that a poor credit score resulting from having made late payments, defaulting on a loan, or even declaring bankruptcy can cost you more when applying for anything credit-related.
But what happens if you have no credit to speak of? While it’s neither bad nor good, it basically makes it much harder for you to qualify for anything you apply for on your own!
So how do you start?
There are several ways first-timers can start building their credit, for example:
- Become an authorized-user
- This is when someone you trust who already has well-established credit can add you to their account so you can use their card. Because this requires a certain level of trust and responsibility, you usually see this happen between parents and teenagers.
- Get a secured card
- You can get a secured credit card from your bank by putting down a security deposit as collateral. Whatever you deposit usually stipulates the limit on your card ($500 deposit = $500 limit).
- Get a credit builder loan
- The purpose of this type of loan is in its name. You don’t get instant access to these funds; however, once you pay the loan amount in full, on-time, and within the loan period, you can access the accrued amount. Think of it like the piggy bank you had as a child, along with the bonus of establishing an excellent credit score!
To keep your credit score high, experts recommend that you keep your credit utilization to 30% or under; that is the sweet spot. It shows that you are spending wisely and keeping your debts low, which is what lenders love to see.
The benefits of having good credit!
If you’ve opened your first line of credit and can demonstrate that you are responsible with your finances, you can qualify for a higher credit limit.
You can do this by:
- Paying off debts on time
- Making small investments that you can comfortably pay over time (e.g., furniture)
- Not Spending beyond what you earn (Debt-to-income ratio)
- Not opening too many lines of credit too frequently
Doing any of these can help you qualify for higher credit limits, as mentioned above, and much lower interest rates when getting a loan, as lenders will reward you for being a responsible borrower and showing that you use your credit strategically.
A lower rate will save you thousands of dollars over the life of the loan compared to a person with higher rates due to lower credit.
Best of all, when you get preapproved with a high score, you may be granted more purchasing and negotiating power to seal the deal on a new house or car closer to your terms and what you feel more comfortable paying. Talk about getting your money’s worth!
The best thing you can do first is to research before applying for a card or loan; make sure if their requirements and interest rates fall within your means and if their benefits actually benefit you, as some credit entities make sweet offers to reel you in. Still, they might not be necessary in your particular case. Having an excellent high score not only looks good on your financial portfolio, but it can open doors and give you advantages that may not be available to you otherwise.
This article was provided by the good folks at Money.com.