Building Credit as a Young Adult

credit card

Credit. You’ve probably heard the word and know what it means, but do you understand how important it is? You need credit to buy a car, rent an apartment, and maybe even to get a job. Building credit as a young adult is important because it will make your financial future as an adult much easier.

Before you start to build your credit, you need to apply for and obtain credit. There are a few different options for you, as a young adult.

  • Start with a checking account. Although having a checking account will not affect your credit score, it will help you establish a relationship with a credit union or a bank. A financial institution is more likely to help their members or clients obtain a loan once they have proved that they can be responsible with a checking account. Your checking account can show that you have steady income, maintain a positive balance, and that you understand money management.
  • Apply for a gas card or department store card. These credit cards can be used to pay for what you would normally buy anyway. Typically, these cards are easier to get than major credit cards.
  • Apply for a secured loan. Maybe you don’t think a credit card is the right choice for you. You can think about getting a secured loan instead, BUT a secured loan requires collateral. Collateral is something of value that you own.  If a borrower cannot pay back their loan, the lender will keep the collateral to in place of the payments. For example, an auto loan is a secured loan. If a borrower could not pay back the loan, the lender would repossess the vehicle.  This is a reason we say that you should not borrow what you can’t afford.  If you don’t have the means to apply for a secured loan, then apply for a small personal loan. Applying for a small personal loan will show a lender that you are credit-worthy once you begin making regular on time payments. Having a personal loan as a part of your credit history will help you obtain larger loans in the future.

Once you have a loan or a credit card, it is important to

  • Use your credit card for essential purchases. It’s easy to be tempted to use a credit card for something we want right away, but can’t afford at the time. Limit yourself to using your credit card for essential purchases only. Buy what you would normally buy with cash, and pay off the balance of the card every month.
  • Don’t spend what you cannot pay back. Spending $100 on credit when you only have $50 to pay towards the bill at the end of the billing cycle is a bad habit to get into. Doing this a few times can quickly make your balance add up, and put you in a tough financial position. Buy what you know you can afford, and don’t rely on a credit card for something that doesn’t fit your budget.
  • Pay at least the minimum payment. If you can afford to pay more than the minimum payment, do it! Even an extra $10 towards every payment can make a big difference, and help pay off your credit card faster. Paying more than the minimum amount due will also save a lot of money on interest. Don’t forget, getting too close to your credit limit will hurt your credit score. The more you pay each month, the faster you will free up available credit and that will improve your credit score.
  • Do not miss a payment or pay late. Payment history is very important to help build your credit. Late fees or missing a payment, even by a day, will drop your credit score. Make sure to make all of your payments on time, so you can avoid these costly outcomes.

Once you start building credit, you will have more opportunities to raise your credit score even higher.  Credit can be a valuable financial tool when used responsibly. Establishing credit will be one of the most important financial moves you make as a young adult, so start now!

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