Have your family members, teachers, or other mentors told you about the importance of building credit yet? It can seem overwhelming at first. After all, there are a billion other things to worry about after you turn 18 – why fret about building your credit score right now?
Luckily, you don’t have to put too much thought into it. In fact, most of what you need to know about building credit as a newly-minted adult will be answered in this article.
So, here’s what you need to know to get started.
Why Worry About Building Credit Anyway?
If you ever hope to get a mortgage, take out a car loan, get a credit card, or really, do anything that involves big financial commitments, you’ll need to have good credit.
Depending on your circumstances, you may even need good credit to get an apartment. So, unless you want to live with your roommate until you’re 85, it’s important to start building credit now.
Here’s another reason why building credit is important: not only will you be more likely to be approved for loans, but you may be approved for loans with the lowest interest rates possible
This alone can save you a lot of money in the long run – money that you can use for other things, like a sweet European vacation or a swanky townhome.
Apply for a Student Credit Card
One of the best ways to start building credit is by signing up for a credit card and using it responsibly. But, not just any credit card will do. The best one for students is, in fact, a student credit card.
These credit cards often have lower credit requirements and credit limits. Think of student credit cards as a set of training wheels: you can test your financial mettle in a safe environment before you apply for products that can really harm you financially if you’re not yet ready for them.
Ask to be an Authorized User on Your Parent’s Credit Card
Another way to build your credit on your credit report is to become an authorized user on someone else’s account.
If you are added on as an authorized user, the credit card history will oftentimes be listed on both accounts (think: your account and that of whoever adds you on as an authorized user).
You’ll also be issued your own credit card for the shared credit card account.
But, here’s the catch: if you rack up charges and fail to pay them off, you risk harming both your credit as well as that of the person who was kind enough to add you on as an authorized user.
That’s why this isn’t a strategy to take lightly. But if it makes you or your parents feel any better, there’s no rule that says you have to use the credit card you’re issued.
You can always leave your credit card at home or hand it over to your parents, that way you’re not tempted to use it.
Use Credit Cards Responsibly
Credit cards are a double-edged sword. On one hand, they’re a great tool for building credit.
However, if you’re not careful, they can harm your credit far more than they can help. Many people have fallen into a cycle of credit card debt by not being careful.
The golden rules of managing your credit cards responsibly are simple:
- Always make your payments on time
- Avoid racking up too much debt (ideally less than 30% of your credit limit)
While two rules might be simple, they’re not necessarily easy to follow, especially since credit card companies let you put off paying for purchases until far in the future.
Here are a few tips that can help you remember to follow the golden rules:
- Set up automatic payments for at least the minimum amount due each month
- Pay off your credit card in full at the end of each month
- Pay off your credit card more frequently (i.e., two or three times a month) to keep the balance from getting out of control
If you can pay off your credit card balance in full each month, you’ll get two specific benefits: you’ll completely avoid credit card debt and you won’t pay any interest.
This credit card strategy gives you a completely free method for building your credit.
Don’t Close Old Credit Card Accounts
Lenders like to see long, established credit history. It shows that you’re not a new kid on the block when it comes to managing your credit.
So, each time you open a new credit card, it’s best to think of it as a long-term account.
The only time you should consider closing a credit card account is if you’re not using it and it carries an annual fee. Otherwise, keep it open, even indefinitely.
This also includes your student credit card, if you get one. After you graduate, you can call up the credit card company to see what your options are.
In many cases, the card issuer will let you keep your credit card as long as you want, even if you’re not a student. Other times, it may offer to trade out your student credit card for a full-fledged credit card, while keeping your current credit history on file.
It’s also important to remember to use your old credit cards every so often. If you don’t, the credit card company may close your account after a while.
Make a note on your calendar once per year to make a small charge — and pay it off before you forget. This way you’ll be able to keep your credit history going for as long as you want.
Apply for a Credit Builder Loan
Many credit unions and other financial institutions offer small short-term credit builder loans for the express purpose of building credit.
These are handy because your credit score is likely to increase with each new type of credit account you open, such as a credit card, personal loan, student loan, etc.
Still, that money can be tempting to some people. Instead of spending it and paying it back over time, a better strategy is to deposit the loan money in a high-interest-earning savings account. Then, set up automatic payments towards the loan.
This sets everything on autopilot and earns you extra interest until the loan is paid off.
Apply for a Student Loan
Speaking of loan types, another way to build your credit is by taking out student loans. But, make sure this is a wise choice so that you don’t get yourself deep into debt.
For example, if you already have your college paid for – either by your parents or through grants and scholarships – you may want to consider this.
Just remember: loans do cost money and student loans are generally long-term loans where you’ll be paying back a significant amount of interest over time.
If you do opt for student loans to help pay for your higher education, they will at least help you build your credit – as long as you make all of your payments on time.
Pro tip: set up your loan payments on autopay so you don’t even have to think about it. No risk of late payments!
Credit scores range from 300 to 900. If you’re just starting out, it can seem like a daunting climb to the top. But, rest assured – everyone has to start somewhere!
Always remember these two golden rules:
- Make your payments on time
- Avoid racking up too much debt
If you can follow these rules, you’ll be well on your way to a good credit score. All of the other tips and advice in this article will only propel you further.