Moving away from home is exciting, but it’s also scary. As you navigate adulthood, you’ll discover many things that you need to know but nobody taught you. How to build your credit is likely on that list.
Whether you’re leasing an apartment or financing a car, you’ll need good credit to prove that you’re responsible with money. But here’s the catch: It takes time to build a solid credit score. So the sooner you start, the better. Take a look at the following tips to learn how to establish strong credit even if you’re young.
1. Use a Credit Builder Card
You can’t get credit without a good credit score, but you need credit to improve your score. This vicious cycle makes the task of raising your credit score feel nearly impossible. How can a young person take charge of their financial future if no one will give them a chance? Enter the credit builder card.
A credit builder card is designed to help people with low credit or no credit history. It requires an initial deposit or a funds transfer that becomes your credit line. This reduces the risk to the issuer, making it more likely you’ll be approved. It functions the same way as a traditional credit card, letting you spend money and repay the balance later.
Using a credit builder card allows you to build credit with purchases you’re already making. You just need to make sure you pay your monthly bill on time. If you mismanage your card, you risk harming your score even more.
2. Paying Monthly Bills
Now that you’re flying solo, you’re probably responsible for paying your own bills. While paying for utilities stinks, it could be the key to boosting your credit. There’s a growing trend toward using such “alternative data” to boost credit scores. However, your stellar on-time payment record won’t be reported to credit bureaus unless you take steps to make that happen.
Fortunately, there are free and paid options available to help you report your payment of things like utilities, subscriptions services, and rent. You can use services like Experian Boost to inform credit bureaus of your timely payment of streaming services and utility bills. For rent, companies like Rental Kharma and Rent Reporters will perform the same service. While their credit-improving results may vary, these services are worth looking into.
3. Start Small
It may be tempting to overspend when you get your first credit card. But making purchases you can’t afford will quickly backfire. A recent study found that 30% of Americans have between $1,001 and $5,000 in credit card debt. Overspending can leave you with a large debt you’re unable to pay, taking a serious toll on your credit score.
For young people looking to build credit, it’s important to consistently pay off your card on time. However, if you’re continuously making big purchases, this will be a challenge to keep up with. Instead of buying tickets to Coachella, use your card on small recurring expenses like your Netflix subscription. This reduces the chance you’ll fall behind on payments and leaves more credit available in case of emergencies.
4. Pay Off Your Student Loans
If you’re a college student, chances are you’re taking out student loans. While you don’t have to make payments on them now, you will after you graduate. Failing to pay them off in a reasonable time frame could negatively impact your credit. On the flip side, making regular payments on your student loans demonstrates that you’re a responsible credit user. This can help raise your credit score.
To ensure your student loans are moving your credit in the right direction, don’t take out more than you need. This will make your payments more manageable after graduation. It may be tempting to use your loans to buy food and pay rent. However, it’s best to use these funds for education expenses only and get a part-time job to cover the rest.
5. Keep Your Credit Usage Low
While you may have a certain amount of credit available, that doesn’t mean you should use all of it. The amount you owe in relation to your credit limit makes up a decent chunk of your credit score. If you go on a shopping spree and use 90% of your available credit, your score will take a hit.
Wondering how much credit is safe to use? There isn’t a set rule. However, most experts agree you should try to stay under 30%. If you venture over that threshold one month, don’t worry. Credit score damage from high credit utilization is easily reversed within a few months if you pay down your balances.
6. Check Your Credit Report
The only way to know if your credit is improving is to check it. Even if you’re financially responsible, other outside factors can still impact your score. Your issuer may have incorrectly reported a payment, or someone might have stolen your identity, taking out accounts in your name. In both circumstances, your credit may be negatively impacted, but the only way to fix it is to catch it.
To keep tabs on your credit, it’s recommended that you check your credit reports at least once a year. All three credit unions are legally required to provide consumers with one free credit report annually.
For many of life’s big purchases, you’ll need strong credit. However, a good credit score can’t be created overnight. That’s why it’s important to start building credit when you’re young. By doing so, you’ll set yourself up for success down the line.
