One of the great things about being a young adult is that it’s unlikely that you have any negative marks on your credit. Having a top-tier credit score (classified as 720+) is the result of having positive credit items, a good payment history, and time. A good credit score requires some credit history – the longer, the better.Building credit is quite easy and there’s never a good reason to put it off. The sooner you get started, the better your credit score will be.
Tools to Build Credit
Just like you need tools to build a house, you’ll need tools to build your credit, too:
1. Credit cards. This is the most common way to get started. Credit card companies usually consider you to be a good risk, primarily because they believe your parents will jump in and help if you get into trouble.
• Be picky. Since you do have a lot of options, look for the best card. The primary things to look at are the interest rate and the annual fee, if any. Be sure to read the fine print. A card might give you a rate of 8.0%, but then reverts to 21.0% after 90 days. Or the rate might rise dramatically if you are even one day late with a payment.
• Use your card wisely. That means that you pay it off, in full, every month. It also means that you don’t buy things you don’t need. Books, gas for your car, plane tickets, food, and more are all reasonable. Just be sure that you have the cash on hand to pay the bill when it arrives.
• Your credit score will be influenced by your payment history and the percentage of your available credit that you use. If your limit is $1,000 and your balance is $500, then your utilization rate is 50%. The goal is to keep it below 30%. Higher than 30% lowers your credit score.
2. Get a loan. Any kind of loan will do, as long as the payments are reported to the major credit bureaus. So you could get a car loan or even a loan against your savings account. In the case of the latter, the bank would freeze enough funds in your account to cover the amount of the loan. As you pay off the loan, the corresponding funds are released.
• The nice thing is that you don’t even have to come up with the money to pay back the loan. Use can use the loan itself. Just deposit the loan proceeds into another account and then pay back the loan with that money. You could even take out another loan with that money.
• These loans are very easy to get since they’re 100% secured. If you have to, borrow the money from your parents to get started. Just be sure to make the payments on time.
• When that loan is paid off, get another one and repeat the process.
Creating great credit is quite easy; it just takes a little discipline and planning. If you can get 2 credit cards and use them appropriately, you’ll be well on your way. If you can also get and pay off a couple of loans, you’ll be shocked at how great your credit score is by the time you graduate.