There are many ways you can start building credit as a young individual. But maybe you’re wondering which is best or don’t know where to start. Read on to learn more about easy ways to establish a healthy credit rating. You’ll also discover the significance of building credit in your younger years.
The Importance of Building Your Credit When You Are Young
Below are some reasons why building credit at a young age is vital:
- Your approval odds will be higher for debt products, assuming you have good credit.
- You could qualify for more competitive financing terms on credit cards and loan products.
- You can potentially qualify for existing loan products and get lower interest rates.
- You may be able to rent an apartment without needing a co-signer or having to pay a hefty security deposit.
- You can apply with service providers (i.e., utility, cell phone, cable) on your own.
- You may qualify for lower insurance premiums in states where insurance providers are allowed to credit-based insurance scores.
- Your credit report may be reviewed by a potential employer when deciding if you’re the right candidate for a position with their company.
How Young Can You Start Establishing Credit?
You can start applying for credit on your own when you reach the age of 18. Or you could be added as an authorized user to your parent’s credit card if you want to start building a credit history even sooner.
How Long Does It Usually Take to Establish Credit?
When you open a credit account, and it’s reported to the credit bureaus, you start to establish credit. However, the FICO scoring model won’t generate a credit score until the account is at least six months old. VantageScore is slightly different, though. You only need to have an account open for one to two months for a score to establish a credit score.
Ways a Young Person Can Establish Credit
There are several ways for your individuals to start building credit.
Sign Up for Experian Go
Experian Go is a free service that can help you establish credit, regardless of your financial experience. It caters to consumers with little or no credit history and simplifies the credit-building process.
Here’s how it works:
- Step 1: Sign up for a free Experian account. To get started, download the mobile app or scan the QR code found on Experian’s website and enroll in your free membership.
- Step 2: Complete the brief questionnaire. It includes questions related to your earnings, expenses and spending habits to assist Experian with tailoring a suitable plan for your credit journey.
- Step 3: Start establishing a credit history. You can take advantage of a credit card offer from an Experian partner if there’s one available through CreditMatch or become an authorized user on a friend or relative’s credit card account. There’s also the option to sign up for Experian Boost, which gives you credit for on-time phone, utility and streaming bills you already pay to help you build a credit history. Experian Boost is also free.
- Step 4: Expand your credit knowledge. Experian will offer educational tools and resources along the way to help you make the most of your credit-building journey.
- Step 5: Receive your first credit score. If you opt to use Experian Boost, you could receive a credit score right away. Otherwise, you’ll have to wait roughly six months to have enough data in your credit report for a score to be generated.
You can also visit Experian.com to learn more about other products that could be a good fit or to get your free credit score.
Become an Authorized User
As mentioned above, you can become an authorized user on your parent’s credit card. It’s only beneficial, though, if they’ve managed the card responsibly and don’t carry a high balance. The credit card issuer should also report account activity to the credit bureaus. Plus, you should know that you can be removed as an authorized user at any time.
Get a Secured Credit Card
Secured credit cards work like traditional credit cards, but there’s a key difference. Before the credit card issuer will open the account, you must make a security deposit typically equal to the credit line. Then, with responsible use over time, you can establish a solid credit rating (assuming account activity is reported to the credit bureaus). You could also be upgraded to an unsecured credit card, which means your security deposit will be returned to you. But in the unlikely event you fall behind on payments, your secured credit card will be closed, and the amount you owe will be deducted from the security deposit.
Pay Your Student Loans on Time
Student loans are another viable way to establish credit. Simply make timely payments each month once the repayment period starts, or you can start paying sooner to start building your credit health. Either way, your credit score will benefit over time.
Get a Credit Builder Loan
If you’re approved for a credit builder loan, you’ll make a security deposit to the lender that’s equivalent to the loan amount – typically between $300 and $1,000. The funds are held in a savings account while you make monthly principal and interest payments that are reported to the credit bureaus. Once the loan term ends, the funds are returned to you and can be used however you see fit.
Keep Your Balances Low
Your credit utilization, or the amount of your credit line in use, is the second largest component of your credit score. Therefore, aim to keep credit card balances at or below 30 percent of your credit limit to build a healthy credit score. To illustrate, if the limit on your credit card is $2,000, the outstanding balance should be no more than $600.
Diversify Your Accounts
Lenders and creditors like to see a blend of installment (i.e., personal loans, student loans, auto loans) and revolving accounts (i.e., credit mix). Your credit mix is only 10 percent of your credit score, but it could have a major impact if you have a limited credit history.
