How Credit Score is Established & Used for Young Adults

As a young adult looking to build a strong foundation, you will learn that there are various ways to successfully build credit. Whichever path you decide to take, it is important to start establishing your credit sooner rather than later. A positive credit history will help you in many ways and save you money during your transition into adulthood.?

If you are a young adult with limited experience with credit, you may not realize all the ways good credit can make life easier and prevent difficult situations in the future. Here are some reasons why you should start building credit early:

Applying for cards/loans – Your credit history is vital when you are applying for loans or credit cards. If you have good credit, your approval process will be easier, and you will be offered better terms.

Leasing a house/apartment – Your landlord will most likely pull your credit report before considering your application. If you have bad or no credit, you may have to pay a larger security deposit.

Getting a phone plan – You may need good credit if you want to get off your parents’ plan and get yourself a new phone with a monthly plan.

Getting insurance – Your credit history can determine your insurance rates. Having good credit could lower your monthly premiums depending on the company. Although you may still be on your parents’ car and health insurance now, you may have to get your own sometime in the future.

Refinancing your loans – You can refinance private student loans at a lower interest rate if you have a higher credit score.

There are various ways to build credit, which all involve creditors reporting your payment information to the 3 major credit bureaus: Equifax, TransUnion, and Experian. To start establishing credit, try some of these options:

Become an authorized user – If either or your parents have a good credit history, you can ask them to add you to the account. As an authorized user, your credit score will benefit if your parents continue to make payments on time and keep the balance low.

Open a student or secured card – If you are a college student, you can apply for a student credit card which is usually easier to get approved for. If not, you can apply for a secured credit card, which requires a security deposit that typically becomes your credit limit. Some card issuers will eventually transition you to a regular credit card once you’ve proven responsible use of the card.

Pay student loans on time – If you took out student loans for school, your lender would report your accounts and payments to the credit bureaus. If you make your payments on time, the loans can help you establish credit.

Building credit is simple and not too difficult, but some common misconceptions can set you back and cost you money in the process. Here are some common mistakes you should avoid:

Missing Payments – Any late credit card or loan payment will negatively affect your credit score. Set up automatic payments to help avoid the stress of forgetting about a payment, but make sure you have sufficient funds in your account.

Taking on too much debt - Do not get into a situation where you spend more than you can afford to pay off each month. Carrying a balance leads to interest charges and having too high of a balance can negatively affect your credit score. Use your credit card only for purchases that you can afford to pay off within the month.

Submitting too many loan/credit card applications – When you apply for a loan/credit card, the lender usually requests your report from the credit bureau by doing a hard inquiry. This temporarily lowers your credit score but will eventually disappear. Too many hard inquiries will lower your credit score and show lenders that lending to you may be a risk.

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Once you begin establishing credit, you should consider signing up for a credit monitoring service. Annualcreditreport.com offers a free credit report every year from each of the credit bureaus. You are probably now starting to realize how important credit is, and the benefit of building credit as early as possible. Do your research, decide what type of accounts you want to open, and form a blueprint for how you are going to make on-time payments and track your progress. Start now and you will be one step closer to financial independence!