Millennial Money: Time to Build Your Credit
Sooner than you think, your credit score will start to count. Here is what you need to know.
Sooner than you think, your credit score will start to count.
A good credit score can be the difference between qualifying for or missing out on a low-interest apartment or car loan. So, to get credit ready when you need it, now is the time to start building a good, long credit history.
There is more than one way to get credit, and it can be as simple as reporting your current bill payments to the major credit bureaus. But keep in mind: building credit takes diligence, especially since missing payments can hurt your score for years to come.
WHAT IS CREDIT AND WHY IS IT IMPORTANT?
Your credit score is a number that typically ranges from 300 to 850 and is calculated based on how reliably you have paid off your past debts, such as credit card bills. Lenders use your credit score to predict the likelihood of you paying off your debt.
Your credit score helps determine what loans you can receive, what interest you will be charged, what credit cards you can qualify for, and what properties you can rent. An employer can even check your credit history. Having a good credit rating can save you money down the road, mainly through lower interest rates when you get a loan.
If you are starting out with no credit history, you are not alone. In the United States, nearly 40% of people aged 20 to 24 have little or no credit history to generate a score, according to the Consumer Finance and Protection Bureau. Unfortunately, the same is true for around 20% of the population.
Building up your credit can seem overwhelming if you haven’t thought about it before, but there are plenty of strategies you can employ even if you’re just getting started. Start by establishing good debt management habits, such as not taking on more debt than you can afford, says Brittany Mollica, a certified financial planner based in Chapel Hill, North Carolina. Missed payments will damage your score and can become a burden when you need to borrow money in the future.
“It’s really important to have good habits to always pay your bills,” says Mollica. “You don’t want to have to come out of a hole with all kinds of credit card debt you’ve racked up, especially by starting early.”
CREDIT CARDS –– AND ALTERNATIVE CARDS
Credit cards can be a great tool for building credit, but they can also hurt your score if you take on more debt than you can handle.
If a parent or other trusted person in your life has a high credit limit and a long history of timely payments, you could become an authorized user on their account and benefit from their good credit. It’s one of the easiest ways to lengthen your credit history, says Blaine Thiederman, a certified financial planner in Arvada, Colorado.
Becoming an authorized user will also affect your credit utilization rate, or the amount of money you owe lenders divided by the total credit you have, which can improve your credit score.
If you have your own income, you can apply for a credit card at the age of 18; otherwise, you have to wait until you are 21. A secured credit card is usually the best credit card to start with. A cash deposit secures these cards, and because the credit card company may accept this deposit if you miss payments, people with short or poor credit histories may be eligible.
The deposit you need to make for a secured credit card could be a burden, and if so, another card could be better for you. These cards use income and bank account information to determine your creditworthiness rather than your credit score.
If you live independently, payments for rent, utilities, and phone bills can all be reported to the credit bureaus. So paying those bills can boost your credit if they’re on time and you’ve reported them.
Unlike credit card payments, these payments are not automatically flagged and may require a third-party service, such as Experian Boost or UltraFICO, to notify the credit bureaus of your payments.
Keep in mind that 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 loan payments can also help build your credit. And even if you don’t have a credit history, some loans are available.
Loans to credit builders rely on income rather than credit for approval. If you are approved, the loan is in a bank account and becomes available after you have paid it off. Your monthly payments are reported to the major credit bureaus.
Student loans are another loan that you can use to build your credit when you are starting out. Federal student loans do not require credit to qualify, unlike most private student loans. Paying off your loans will help boost your credit history, and you can get started while you’re still in school by making interest-only payments.
This column was provided to The Associated Press by the NerdWallet personal finance website. Colin Beresford is a writer at NerdWallet. Email: [email protected] Twitter: @Colin_beresford.
Data point: Invisible credits https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf
NerdWallet: Does Paying Bills Increase Your Credit? https://bit.ly/nerdwallet-will-paying-bills-help-build-credit
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