It might seem boring — and even scary — but your 20s are the perfect time to start your financial journey by building your credit. While buying a house or a new car might seem like a distant dream, the best way to set yourself up for success is to start building your credit now.
Whether you’re still in college or in the early stages of your career, there are straightforward and simple ways to show you can responsibly manage your finances.
But where to even begin? Let’s start with the basics.
What is a credit score?
While credit can seem like a complicated financial topic, it’s actually pretty basic. Essentially, your credit score is a numerical value associated with how likely you are to repay a loan. Starting at 300 and going up to 850, the higher your score is, the more likely you’re seen as trustworthy and fiscally responsible with loans and monthly payments.
It can get a bit complicated when understanding how your score is calculated. Your score is based on several factors, including your credit history, the number of accounts open, how much debt you have, and how regularly you make payments. Each of these factors impacts your credit score differently, requiring diligence to ensure your score stays high.
Why is it important?
While you might not have cared about your credit score in the past, your 20s is a great time to start showing how you are financially responsible by building your credit. The higher your credit score is, the more likely you are to get approved for loans like a mortgage or car loan, and the better your terms will be. Lenders and credit card companies will offer lower interest rates and loan you more money if you have proven you have responsibly managed your finances in the past.
Ultimately, building your credit in your 20s is a great (and easy) way to set your future self up for financial success later in life when you need it most.
How can you build credit in your 20’s?
If you’re just starting to build your credit, the good news is you have a clean slate to work with. But where to begin? There are a few simple and easy ways to start building your credit.
1. Get approved for a beginner or student credit card
A beginner credit card is a great way to show you can spend and borrow money responsibly. Most major credit card companies offer student or beginner cards with no annual fee and lower approval requirements, making it the perfect solution to start building your credit.
There are a few different options for beginner credit cards. If you have fair or limited credit, you may be approved for a beginner card like Capital One Platinum, which has no annual fee, or the Discover it Student Cash Back Card, which rewards users by keeping a GPA of 3.0 or higher.
If you don’t have any credit history, you can likely get approved for a secured credit card, which requires you to prepay the credit limit as a deposit amount. Discover also offers a secured credit card where you can determine how much of a deposit you want to put down.
Any of these options will help you start building credit.
2. Keep your credit utilization low
If you got approved for a credit card, congrats! You’ve opened the door to building your credit. However, as they say, with great power comes great responsibility. Now that you have a credit card, you need to show that you’re responsible with your spending by keeping your credit utilization low. This is a big factor in your score and can be negatively impacted if you use more than 30% of your approved limit. For example, if you have a $1,000 credit limit, you should keep your credit card balance below $300.
The best – and the safest – way to manage your credit cards is to pay the balance in full at the end of each month. This ensures you won’t pay interest on any of your purchases, keeps your credit utilization low, and indicates you’re not spending more than you can afford. A lot of people get into trouble when they maintain a balance on their credit cards and rack up interest charges, adding to the overall amount due and putting them in more debt.
3. Pay all your bills on time
The easiest way to build credit? Pay your bills on time! Whether it’s your credit card bill or a cell phone bill, making sure your payment is on time and for the correct amount will help improve your credit history – a significant factor in your overall credit score. It’ll also help you avoid any late fees. The best way to ensure you’re consistently making on-time payments is to set up an autopay on your accounts. If you cannot pay your bill in full one month, at least make a payment for the minimum required amount to keep your account in good standing.
4. Put your name on a lease or utility
If you rent an apartment or pay any utility bills, have your name listed as an account holder. Credit agencies like to see that people can regularly pay their living expenses like rent, electricity, water, or internet. You’ll also get bonus points if you show you don’t move too often. If you’re not quite eligible to get a lease on your own, you can still have your parents co-sign on a lease. Just ensure you’re still associated with the account as a responsible party so it will show up on your credit history.
5. Stay up to date on your credit score
As you build your credit, keeping track of how your score changes is crucial. The good news is there are a lot of apps and websites that will track your credit score monthly and keep you posted when or if your score changes. Check out websites like Credit Karma to stay up to date on your score and how you can improve it.
If you’re looking for a complete and official credit report, you can request one from annualcreditreport.com — a federally authorized website that annually provides one free credit report to Americans. When you get this report, read through it thoroughly to confirm everything is accurate and there are no errors negatively impacting your credit score.
Building your credit doesn’t have to be intimidating. Think of it as a fun challenge to show the world how responsible you are with your finances! Your future self will thank you for making smart decisions in your 20s so you can secure your financial future for decades to come.