Credit can be a mysterious subject with many variables. It’s important to be aware of strategies to build credit for young adults, so you can be proactive in your consumer and life choices. Building up credit is critical to making steps to better spending habits as a young adult and developing a long-term budget plan. As this post goes, we’ll discuss several subjects how to begin building credit, timeline to establish credit, how are credit scores calculated and more.
How Long Does it Take to Establish Credit
Establishing a credit score takes about six months from when you open your first account. Timing can change based on many factors. But whether you’re rebuilding or building from scratch, excellent credit scores depend on responsible credit use. The timing to rebuild credit depends on so many factors, but especially your starting score and your goal score.
Credit Score Factors
There are three major credit companies and they each have different values for each of these categories. As you study strategies to build credit for young adults, keep these definitions in mind.
Payment history
Payment history is a crucial factor in determining your credit score, making up 35 percent of your overall score, according to myFICO. This includes a track record of paying bills and debts on time. It essentially shows lenders how reliably you manage your financial obligations. A strong payment history, characterized by on-time payments, is crucial for maintaining a good credit score or rebuilding a credit score.
Current debt and Credit Utilization Ration
The total amount of debt you owe across all your credit accounts is another major factor in your credit score, making up 30 percent of your FICO score. This factor focuses on your credit utilization ratio and overall amounts owed. High levels of debt can negatively impact your credit score, especially if you’re using a large percentage of your available credit or have a high debt-to-income ratio.
Types of credit and number of lines of credit
Having a mix of installment credit (like loans with fixed payments) and revolving credit (like credit cards) can positively impact your score, demonstrating your ability to manage different types of credit responsibly. Two or three credit cards, along with other forms of credit like installment loans (car loans, mortgages), is often recommended, according to Equifax. Focus on responsible usage, like paying bills on time and keeping balances low, rather than solely on the number of accounts. Having a mix of credit makes up 10 percent of your overall score.
Age of your credit accounts
A longer credit history generally has a positive impact, indicating to lenders that you have experience managing credit responsibly. Closing older accounts can shorten your average credit age, potentially negatively impacting your score. The length of your credit history makes up about 15 percent of your overall score.
New credit applications
Depending on the lender and their tendency to do a soft pull vs hard pull, applying for new credit, like opening a credit card, can temporarily lower your credit score due to a hard inquiry on your credit report. However, the impact is usually small, and the score often rebounds quickly with responsible credit management.
How to Begin Building Credit for Young Adults
With these factors in mind, building credit is not an overnight process. It took me about six years to see my credit to improve because of the age of my accounts, even when all my other factors were on the up and up.
When I first started to build my credit, I started with one credit card from Capital One with a $200 limit. Once I had that for a few months, my credit improved and I was approved for a Discover card that had cash back. As COVID happened and I started to struggle financially, I strived to always make sure I made my payments and use my card responsibly, not exceeding the maximum limits or exceed the amount that I could make the minimum payments. The hard work paid off because from there, I’ve maintained an excellent credit score, which has saved me money on auto loans, loans from my bank, and even a mortgage.
Practice Responsibly
When I first started trying to build my credit, I didn’t start with a credit card. I wanted to make sure that I could be responsible with my day to day bills like rent, utilities, internet, etc. I used a budget template for young adults like this to help me determine how much I could afford to use a credit card. And those type timely payments did help contribute to my credit even before I acquired a credit card. If possible, I recommend starting with basics before signing up for a credit card.
You can also become an authorized user on the credit card account of a trusted family member which can help develop the habit of being responsible while building credit.
Do your Research
Once you decide you’re ready for a credit card. Do you research about fair credit cards or secured credit card.
A secured credit card requires a security deposit to open and maintain. This deposit serves as collateral, providing the card issuer with security in case you don’t make your payments.
If you are a student, research specific cards designed for students with fair credit, such as the Capital One Savor Student Cash Rewards Credit Card, are available.
Companies will offer different annual fees, interest rates or reward programs. Compare the different cards to find the best fit for your needs.
Also do research about what company you want to start with. When searching online, you might find some ‘companies’ that are similar to the more well-known companies. Avoid companies that have offers that are too good to be true or that you wouldn’t be able to visit a physical location or office and talk to a real person if necessary.
Acquire a Small Loan
Another way to build credit for young adults in a responsible way is to get a small loan of up to $500 and pay it off. Make sure this loans goes to something you actually need and are able to make the monthly payments. Again do you research and read the fine print because different lenders have different options for interest, repayment terms, etc.
Avoid multiple hard credit checks
Applying for a new credit card or loan typically triggers a hard pull for your credit. The record of those inquiries can stay on your credit reports for up to two years.
Opening several credit accounts in a short amount of time will negatively impact your credit score, but one way to avoid unnecessary hard inquiries is to see if you’re pre-approved or you can see if the lender does a soft pull, as they don’t usually impact credit scores.
Best Credit Cards for 20 year olds
Although Chime does a credit builder option, there are mixed reviews on what it reports to credit report companies. I recommend staying with well-known companies like Discover, CapitalOne, Visa, etc. Each company has a secured credit option, and unsecured options for beginners. Here is an article on Nerd Wallet that breaks down a few of the top credit cards for beginners.
At what age can you start building credit
At 18, you can start applying for your own credit cards, but with a bit of support from your family there is an option to start sooner.
Authorized User
Strategies to Build Credit for Young Adults
In conclusion, there is no better time to start building credit than as a young adult. With the support of family, you can start sooner as an authorized user, but at 18 you can also start building your own credit with these simple strategies. You can also get budget templates to help you determine how to best use your credit card. Don’t forget to pin this information for later!
