Why It Is Important to Establish Credit While You're Young

As a young person beginning college or moving away from home, it can be difficult to head out on your own for the first time. There’s a lot to learn as you navigate life, especially when it comes to finances. Paying your own bills, starting to build up your savings and managing your finances are all important aspects of establishing yourself as an adult. However, one item that isn’t discussed as often that is extremely important to take into consideration is your credit score.

For a lot of young adults, a credit score can seem like a very far-off problem. You might figure that you’re not planning to buy a house and pay a mortgage anytime soon, so what’s the point? But, your credit score actually determines quite a bit of your future. The good news is that with some preparation now, you can set yourself up for success in the future.

Why should young people care about their credit score?

Your credit score impacts many aspects of your life, and it might come into play sooner than you expect. One factor that goes into determining your credit score is your length of credit history. So, the longer you have credit, the better your chances of achieving a higher score will be that’s why it’s so important to start building credit while you’re young. Here are the top 7 ways your credit report is used, how it can impact your life as a young adult and why it’s important to have a good credit score:

1. Leasing an apartment
   When you’re ready to sign the lease on your first postgrad apartment, your potential landlord may check your credit report to ensure that you’re a responsible person who pays their bills on time. Having good credit could make your application stand out. But having bad credit could lead to them rejecting your application, requiring a creditworthy cosigner or requesting a higher security deposit.¹

2. Setting up utilities
   Utilities companies often ask for your Social Security number to check your credit. A poor credit history could make it difficult to get services, and not having any credit history may require you to pay a deposit.²

3. Applying for a job
   When you’re applying for jobs, your future employer might look into your credit report to make sure you’re a responsible, trustworthy employee. This is especially true for positions that deal with bank transactions, bookkeeping or management of company accounts. In fact, 29% of employers use credit checks when hiring for certain positions.³

4. Buying a car
   Unless you’re buying a car outright with cash, you’ll need to secure financing. If you don’t have any credit established, you may need a creditworthy cosigner to assist with the purchase. If you have poor credit, you may receive a high interest rate, ultimately increasing the total price of your car. Or worse, you could simply be denied all together. In contrast, if you have good credit, there’s a higher likelihood you’ll receive better rates and pricing for your new vehicle.⁴

5. Buying a house
   Buying a house may seem like something very far into the future, but establishing a good credit history early will help you qualify for a mortgage down the road. Additionally, good credit can help secure better rates, which could result in tens of thousands of dollars in savings over the life of a 30-year mortgage.⁵

6. Getting a cell phone
   Aside from the monthly service fees cell phone providers charge, many people are choosing to finance their devices as well. While many college students are on their parents’ cell phone bills, it can be a harsh reality after graduation if you’re expected to have your own account. As soon as you need your own plan or want to upgrade your device, carriers will look into your credit history in order to make sure you’ll make your monthly payments.⁶

7. Receiving better interest rates on credit cards and loans
   When applying for a credit card or loan, credit card issuers and lenders will look at your credit history to determine your eligibility and interest rate. The higher your credit score, the more likely you’ll be approved for the credit card or loan and the better interest rate you can receive. This will be particularly useful if you have student loans and are looking to refinance them. The lower your interest rate, the less interest you’ll pay, meaning you’ll pay down the principal of the loan faster.

What should college students do when starting their credit?

The best way to start your credit journey as a college student is to become an authorized user on a parent or guardian’s credit card, assuming they have good credit. This allows for a low-risk way to build credit. In fact, you don’t even need to use the card at all if you are named as an authorized user, you’ll reap the benefits of the card holder.⁷

• Why should college students have credit cards?
  By the time you approach your senior year of college at the latest, you’ll want to apply for your very own first credit card. In fact, 57% of college students now carry a credit card. If you’re worried about overspending, just make a couple of purchases a month on your card until you’ve gained more confidence. Be sure to always pay your bill on time, even if it’s only the minimum payment. Ideally, you should pay your card in full each month to avoid paying interest or getting into debt. Having a credit card as a college student will help you build credit and teach you how to responsibly manage your money.

How can I build my credit in my 20s?

Once you’ve finished college, you can continue to build credit in your 20s to set yourself up for a lifetime of financial health. Here are the top 5 ways:

1. Apply for credit selectively
   Signing up for too many cards at once may suggest you are a riskier borrower, which can discourage lenders from issuing credit to you. Only apply for one card at a time and wait at least six months before applying for another.

2. Consider a secured card
   If you are just starting out as a young adult and are having trouble getting a standard credit card, consider applying for a secured card. This is an account in which you make a deposit with the lender issuing the card. You can use the card to buy items up to the amount of your deposit. Payments on this type of card count toward your credit history. A track record of paying on time may lead the card issuer to eventually offer you a standard credit card.

3. Consider a store credit card (for a place you shop regularly)
   A store credit card will build credit just like a regular credit card, and you might even earn rewards. Making purchases on these cards and paying off your bills on time will build your credit. Just be aware that store credit cards often have very high interest rates, so it is imperative to pay them off in full and on time each month.

4. Take out a small loan
   If you know that you can make the payments, it can be helpful to take out a small personal loan. This allows you to build credit history as you make on-time monthly payments and repay the loan.

5. Finance an inexpensive car and make the payments
   If you need a new vehicle and have no credit, consider an inexpensive new or used car. Making on-time monthly payments will prove to lenders that you are a responsible borrower and could help increase your credit score.

Keep building credit

Did you know that 46% of millennials feel like their credit score is holding them back? It can seem like a lot of work to build credit, but even small steps will help. Try not to get overwhelmed a healthy credit score won’t happen overnight, but your credit will grow with each timely payment you make.

Having a solid credit score at a young age puts you at a great advantage for the future. If you start fostering healthy habits early on, you’ll be on the right path toward an impressive credit score that can open up opportunities down the road. We wish you the best of luck with your credit journey!