The Young Adult Guide to Building Credit
They say cash is king, but credit opens more doors for you. Want to finance a car? Obtain a home loan? A lower credit score means a higher interest rate, so why would you want that for yourself? Building credit is not that difficult. Spend within your own means and reap the benefits.
I started building credit when I was 18 years old. 10 years later, my credit score is well above the 800s. This is the young adult guide to building credit.
Disclaimer: I am not a financial advisor, and this blog post is not a substitute for a professional who is accredited in this field. I’m sharing my experience and what worked for me.
Employers Checking Credit
There are certain employers that perform credit checks, especially when your position involves security clearance or access to sensitive assets/information. This tells them how responsible you are with money, the likelihood of theft due to pressure, insider threats, etc. I had my first credit check when I accepted an offer from my graduate job. Thankfully I had good credit at age 21.
In layman’s terms, paying with credit (i.e. a credit card) is using an institution’s money and paying for the goods upfront, then paying them back in the agreed terms at a later time. You’re not paying directly from your bank account (debit card) while using your credit card during that transaction. As you pay back the money, your credit score is influenced to show you’re trustworthy.
Credit scores range from 300 to 850 in most cases. The higher, the better. The classification range of a credit score can look like:
- Poor: 300-579.
- Fair: 580-669.
- Good: 670-739.
- Very good: 740-799.
- Exceptional: 800-850.
The higher your credit score, the more likely loaners/creditors would give you a better deal for the terms and conditions of a loan. Someone with a credit score of 810 is likely to secure a loan with the market rate interest for a car (I got mine at a 0.90% for my car), while someone with a credit score of 600 could be hit with a 10.40% interest rate for that same car. Interest means you’re paying additional money on top of how much you’re borrowing. For a $40,000 car, that means you’re paying about $11,000 in interest over five years, totaling about $51,000. That 0.90% interest would’ve meant paying less than $1000 in interest, totaling about $41,000. This is all an estimate, so look at the bigger picture.
Building Good Habits
Healthy finances mean building good habits. Can you still build credit and good habits while being a material girl? Definitely, as long as those are within your means of affordability. Having a credit card doesn’t mean you go ham on purchases just because your bank account doesn’t instantly go down. If you miss a payment, your credit score gets impacted.
- Treat credit like debit: Understand how much money you’re making and how much you’re retaining after expenses. Don’t spend more than what you have on non-essential items.
- Staying away from “pay in xx” services: Klarna, Afterpay, Affirm, etc. Stay away from those; they build bad habits. Pay in 4 for an $80 dress sounds great when you’re a college student with a part-time minimum wage job. I’ve been there. The problem with this habit is that you’ll trick yourself into thinking you spent $20 this week for that dress and think you can spend more money via the pay-later services. With that mentality, you might try to justify using the same service for other purchases and end up having to pay $xx three times for something you bought six weeks ago. This goes back to treating credit like debit.
Applying for a Starter Credit Card
For college students, leftover Financial Aid and allowances can count towards the income you enter when you apply for a starter credit card. There are plenty of excellent credit card options for first-timers. Discover has a student credit card program, except there are some places that may not accept Discover. I loved Chase Freedom when I was in college because the cashback program is simple. Definitely do some research on this, and make sure you start with a $0 annual fee credit card.
Store Brand Credit Cards
There are stores that offer their own credit cards through major distributors such as Visa, Mastercard, etc. You need to be cautious about whether you can use the credit card at other stores, and how much you actually spend at that store. If you spend $200 per year at that particular store, the benefits might not be worthwhile for you. The Target credit card is great for a 5% discount on eligible purchases, but you can’t use that card anywhere else. If you get the Mastercard version of the Target credit card, you can use it outside of Target.
I was never a big fan of store-brand credit cards. Some stores can sucker you in through 0% “financing”, but honestly, the only store that’s worth that benefit is likely Best Buy for major appliances. Otherwise, just pay for that brand-new iPhone + Mac Book Pro in full.
Store associates will always try to sucker you into their store credit card to fulfill their personal quota. Just be adamant about saying no. Even attempting to apply will impact your credit score.
There isn’t a store I spend that much money on to justify its dedicated credit card, including Whole Foods Market.
Circumstances for Awareness
There are several factors contributing to your credit score. There are months when doing everyday business can lower your credit score by 1 point or even increase it by 5 points. Missing a payment for over a month can hurt your credit score by 100 points or more, and it can take years to rebuild that. Here are some factors to be aware of:
- On-Time Payments: Just pay your bills on time. Spend what you have, pay early, and pay multiple times per month. I have a habit of paying off my balance twice per month.
- Credit Usage: How much of your total credit limit are you carrying at the time? If your credit limit is $3000, try not to carry a balance of $1000 or more at a time. For lower credit limits, paying off the balance multiple times per month will help.
- Credit Age: This takes into consideration the age of all of your credit accounts. Closing old accounts and opening new accounts will yield a lower credit age, which can make it seem like you’re new around town, and creditors will not be sure of whether they can completely trust you.
- Derogatory Marks: It’s almost like saying if you don’t pay the credit bills, they will put a bounty on your head. Going back to the first point, pay your bills on time.
- Total Accounts: This is tricky, because the more accounts you have, the more credit inquiries you will have, as well as your credit age going down. They like to see you have a good nest of credit accounts. This also takes paid-off loans into consideration. My student and car loans are paid off/closed but still contribute to this count.
- Credit Inquiries: Any time you apply for a loan or a credit card, the companies perform an inquiry into your account, which impacts the score. Sticking to about 2 per rolling year is a good count. If you apply for a store credit card under pressure and get rejected, your credit score will take a hit.
Start out with a starter credit card. Make everyday purchases you know you’ll pay off. Pay off often and on-time. Over time, you’ll build your credit score and can make better financial decisions.
I'm All Booked Up
This is such a great post on understanding and building credit. The most important lesson I got was pay off the card in full every month. It’s a responsible habit.
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