April 20, 2020
Looking for ways to start building your credit at a young age? If so, you’re already ahead of the game. Getting started on the right foot financially can potentially make things a lot easier for you down the road. Generally, people with established credit have an easier time getting approved for loans. This can be anything from a car loan or student loan to a mortgage, or even a business loan. An excellent credit score can also help you secure a low-interest rate, which allows you to save money over time.
What is a credit score, anyway? In simplest terms, your credit score is a number ranging from 300-850 that is calculated based on your repayment history, account balances, debts, and credit utilization. When you apply for a loan, lenders use your credit score to determine your eligibility.
The three major credit-reporting bureaus (Experian, Equifax, and TransUnion) all have their own methods for calculating scores, but they’re all based on the same principles. As a result, most people’s credit scores with each reporting bureau tend to be similar.
Whether you’re still in high school or have recently started college, it’s not too early to begin building your credit—and we’ve got some practical tips to help you get started.
1. Get Authorized on Family Member’s Account
One of the easiest ways to begin building a credit history is to become an authorized user on a family member’s credit card or another financial account. Most credit card companies will allow you to become an authorized user once you’re 18 or older. It’s also not uncommon for parents to add their adult children as authorized users to help them establish credit.
You don’t need to have any credit to become an authorized user, but doing so allows account activity to be reflected in your report moving forward. Of course, this option is best if your family member is financially responsible and makes their payments on time. Otherwise, their failure to make timely payments could hurt your own credit score.
2. Open a Secured Credit Card
Speaking of credit cards, have you thought about opening one yet? Yes, having a credit card is a huge responsibility, and not one that should be taken lightly. However, starting with a secured credit card can be an excellent option for building credit without the risk of a traditional credit card.
A secured credit card requires you to put some sort of “collateral” down before opening it; this is something (such as cash or even an item of value) that your lender can keep if you default or fail to make payments. That collateral is then equal to your credit limit on the card. For example, you may put $500 down to secure your credit card—and your card will then have a $500 spending limit.
Using a secured credit card allows you to build your credit score (assuming you make timely payments) without the risk of going into credit card debt. In some cases, secured cards don’t require a credit check, so they’re great for people just starting out.
3. Get a Cosigner if Needed
If you’d prefer an unsecured credit card, there are options to get approved with little-to-no credit history. You can start with a secured card or a student credit card. These cards make it easy for students to open their first cards with no credit history required.
Another option would be to find somebody who will agree to be a cosigner on your credit card application. A financially responsible person with an established credit score can cosign on an application. This can also work on a loan, such as a student loan. The thing to remember here is that a cosigner is taking on a serious legal obligation, so you need to stay on top of your credit card payments in order to build your credit history and protect theirs.
4. Make Payments On-Time and In-Full
Opening a secured or unsecured credit card can be a great way to build your credit history, but only if you’re using your card responsibly. The most important thing to keep in mind is to always spend within your means. This is easy enough with a secured credit card, as you won’t be able to spend beyond your initial deposit. With an unsecured credit card, however, it’s easy to spend beyond your means and fall into debt if you’re not careful.
As a general rule, you should treat your credit card as you would cash. Never spend more money than you can afford to pay back by the end of the billing cycle. Also, aim to pay off your credit card balance in full each month. Doing so will help you build your credit quickly and avoid paying interest.
If you think you may have trouble remembering to pay your credit card each month, set up automatic payments online. This will allow your credit card company to deduct your payment from a linked bank account automatically. Only do this, though, if you’re confident that you’ll have enough cash in your account to cover the payment.
5. Keep Credit Utilization Low
Credit utilization refers to the percentage of your credit limit currently being used. For example, if the limit on your credit card is $1,000 and your current balance is $400, your utilization is 40%. Ideally, you should keep your credit card utilization under 30%; a higher percentage can have a negative impact on your credit score.
6. Sign Up for a Rent-Reporting Service
If you’ve already moved out and are living on your own, make sure you’re getting “credit” for paying rent on time. A common misconception people have is that your rental payments are automatically reflected in your credit history, but this isn’t always the case.
If your landlord isn’t already reporting your rental payments to any of the major credit-reporting bureaus, consider signing up for various free services that can report past rent payments to credit bureaus for you. Just remember to begin building credit by making timely rent payments, as missing a payment or being late may have a negative impact on your credit.
7. Track Your Credit Closely
If you’re not already signed up for a free credit-monitoring service, now is to the time to do so. This is the easiest way to keep a close eye on your credit score as you work on improving it. There are plenty of free services that allow you to track credit scores from the three major reporting bureaus. Many will also provide you with monthly reports so you can see how your activity has influenced your scores. Depending on your credit card, you may also be able to check your scores by logging into your online account.
Even with using a credit-tracking service, however, it’s a good idea to obtain a full copy of your credit report to review once a year. By law, you are entitled to one free copy of your report from each reporting bureau annually. As you review your report, be on the lookout for errors or other discrepancies that could be affecting your credit. You can (and should) dispute any errors immediately.
8. Don’t Expect Overnight Results
Ultimately, building your credit is something that takes time, patience, and persistence. You shouldn’t expect to have a near-perfect credit score overnight; it can take years to truly build your credit. Unfortunately, it also only takes a couple of late payments or a defaulted loan to have a serious impact on your credit—so you’ll want to avoid these scenarios as much as possible.
Establishing credit when you’re young does pose some challenges, but by even reading this article and implementing a few of these tips, you’ll be on the right track. From there, making responsible spending choices and living within your means can make all the difference when it comes to your credit score down the road.
Please note that the information provided on this website is provided on a general basis and may not apply to your own specific individual needs, goals, financial position, experience, etc. LendKey does not guarantee that the information provided on any third-party website that LendKey offers a hyperlink to is up-to-date and accurate at the time you access it, and LendKey does not guarantee that information provided on such external websites (and this website) is best-suited for your particular circumstances. Therefore, you may want to consult with an expert (financial adviser, school financial aid office, etc.) before making financial decisions that may be discussed on this website.
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