Your credit score will start to matter sooner than you realize.
A solid credit score can be the difference between qualifying for an apartment or low-interest car loan or missing out. So it’s time to start building a good and long credit history, to keep credit ready when you need it.
There’s more than one way to build credit, and it can be as simple as reporting your ongoing bill payments to the major credit bureaus. But keep in mind: Building credit requires diligence, especially since missing payments can hurt your score for years to come.
What is credit and why does it matter?
Your credit score is a number that typically ranges between 300 and 850 and is calculated based on how reliably you have paid past debts such as credit card bills. Lenders use your credit score to estimate how likely you are to repay the loan.
Your credit score helps determine the loans you can get, how much interest you will be charged, which credit cards you can qualify for and the properties you can rent. An employer may also check your credit history. Having a good credit score can save you money later, mainly through lower interest rates as you secure a loan.
If you are just starting out with no credit history, you are not alone. According to the Consumer Finance and Protection Bureau, in the US, about 40% of people aged 20 to 24 have little or no credit history to generate a score. Unfortunately, the same is true for about 20% of the population.
Building your credit can seem overwhelming if you haven’t thought about it before, but there are many strategies to employ, even if you’re just starting out. Start by establishing good habits with managing debt, such as not taking on as much debt as you can, says Brittany Molica, a certified financial planner based in Chapel Hill, North Carolina. Missing payments will hurt your score and can become a burden when you need to borrow money in the future.
“It’s really important to get into good habits of always paying your bills,” Mollika says. “You don’t want to walk out of a hole in all kinds of credit card debt that you have piled up, especially starting early.”
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Credit cards — and optional cards
Credit cards can be a great tool for establishing credit, but they can also hurt your score if you take on more debt than you can.
If your parent or any other trusted person in your life has a high credit limit and a long history of making timely payments, you can become an authorized user on their account and benefit from their good credit. This is one of the easiest ways to lengthen your credit history, says Blaine Thiderman, a certified financial planner in Arvada, Colorado.
Becoming an authorized user will measure your credit utilization rate, or the amount you owe lenders, divided by the total credit available to you, which can help with your credit score.
If you have your own income, you can apply for a credit card at the age of 18; Otherwise, you will have to wait until the age of 21. A secured credit card is usually the best credit card to start with. A cash deposit supports these cards, and since the credit card company can take that deposit if you miss a payment, people with low or poor credit history may qualify.
What you have to deposit for a secured credit card can be a burden, and if so, a alternate card Might be better for you. These cards use income and bank account information to determine your creditworthiness, rather than your credit score.
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If you live independently, payment for rent, utilities, and phone bills can be reported to credit bureaus. so pay them Bills Can Build Your Credit If they are on time and you have reported them.
Unlike credit card payments, these payments are not automatically reported and may require a third-party service, such as Experian EXPGY,
Boost the credit bureaus to be aware of your payments.
Remember, these services sometimes require a fee and reporting your bill payments may not always affect your credit score; Instead, they may just show up on your credit report.
Making regular payments on loans can also help you build your credit. And even if you have no credit history, there are some loans available.
Credit-builders depend on income rather than loans for loan approval. If approved, the loan remains in the bank account and becomes available after you make the payment. Your monthly payments are reported to the major credit bureaus.
Read further: ‘It’s a punishment for being poor’: Capital One slashes overdraft fees. Why are there no other banks?
student loan There is another loan you can use to build your credit when you are just starting out. Federal student loans do not require credit to qualify, while most private student loans do. Paying off your loans will help you grow your credit history, and you can get started while you’re still in school by paying interest only.
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Colin Beresford writes for NerdWallet. Email: [email protected]