What are ways to build credit when you are in your 20s? Understand why good credit matters and how to know your score.
Why Good Credit Matters
Understanding the power of credit means knowing about your credit score and credit report. While some think having bad credit at some point is a part of growing up, you can avoid it by learning good credit habits early on. Ditch the bad credit stage many go through in their 20s, and instead choose good credit habits in the beginning.
A credit score can mean the difference between having your own apartment or sleeping on your friend’s couch because of a bad credit check. (See what we mean?) Keeping track of your FICO Score and requesting your free annual credit score are simple to do. Here we’ll give you a few tips on building your credit and developing good credit habits.
Know your Score
The numbers can seem tricky, but here’s the 411 on how to get your credit score. FICO scores are the most popular type of credit score. This 3-digit number gives lenders a numeric summary of your creditworthiness. Low scores can harm your financial chances, but you can raise it with careful attention.
There are various places where you can get a copy of or track your credit scores. But we’ll keep it easy with these options:
- Check your credit card company. They often offer free credit score monitoring and credit report options to cardholders.
- Look for free credit monitoring apps online. If you don’t have a credit card yet, then you can use these apps to track your credit score.
- Get your free credit score. You can get your credit score for free once every 12 months from each of the three credit reporting agencies (Equifax, Experian, and TransUnion). (Trust us on this one.) Don’t rush to pay!
The report you want to read
Your credit is one report you’ll want to see. Basic information is included like your previous addresses and employers. But that address you see in Hawaii where you’ve never lived? Pay close attention. You might find errors, and that’s why you need to review it at least once a year. Errors can negatively affect your credit history or signal more serious things like fraudulent activity or identity theft.
5 Ways to Build Your Credit
1. On-time payments matter. Paying early is even better because you won’t be late. Lenders calculate your history of on-time and late payments. The more on-time payments you have, the better it reflects on your credit score, and credit report.
2. Authorized users count, too. Getting added as an authorized user on someone else’s credit card may help your credit, too. Some, but not all, credit cards will report authorized user activity to the credit bureaus. This method of building credit only works if that person has a good credit history. In short, their card is in your name. If you find someone willing to add you, this is an easy way to take small steps to start your credit history.
3. Get a secured card. Having trouble qualifying for a credit card? You may want to consider a secured credit card. These types of cards are for people who don’t have any credit history, or who have bad credit and want to rebuild it. Before you rush out to get one, there’s a little twist to using this type of credit card: you have to pay a deposit, and that money is your credit limit. So, if you pay a $500 deposit, then your credit limit is $500.
4. Pay your balance in full. You have your first credit card (Yay!) but do you keep a balance or pay it off each month? If you can, pay it off in full. This credit pro move shows you can handle the amount you’re spending each month, and that you’re responsible. (Instant account balance alerts can help you track your balance. Always know how much money you have so you can pay off your bill in full. Hint. Hint.)
5. 30% is the magic number. This is the percentage that is commonly recommended to keep your credit manageable. You should try to keep your credit card balance below 30% of your available credit. This number is known as your credit utilization ratio. (Read more about credit utilization ratios.) This shows your lender that you’re using your credit responsibly and you’re not strapped for cash.
You don’t have to experience bad credit in your 20s. Good credit habits start with managing your full financial picture. Choose these simple steps to build and keep good credit that’ll have you sailing through your 20s!