Building a credit history early in life can make a big difference when it comes time to buying a first car or home.
Young adults may feel they can wait before establishing their credit history. But credit affects their lives soon after college, says Julie Heath, director of the Economics Center at the University of Cincinnati.
Like getting a job. Employers often run credit checks on applicants. A 2012 survey by the Society for Human Resource Management found that nearly half of all companies (47%) run such checks on prospective employees. Especially any position that deals with bank transactions, bookkeeping or management of company accounts – an employer may run a credit check to gain insight on how financially responsible you are.
Finding a place to live can also be affected by credit checks. Many landlords run a credit check on potential tenants before signing a lease. A 2014 study conducted by TransUnion found that more than 40% of renters had their credit score checked when submitting a lease application.
"Those with good credit scores often get offered a lower interest rate, which may save them a lot of money," Heath says.
Establishing a Credit History
You are not born with a credit history. As a young adult, you need to show lenders you can borrow money responsibly – and pay it back.
Getting your first credit card can be a great way to build credit history. Every bill you pay will contribute to your credit record. Paying on time, even if it’s only the minimum payment, will help build a healthy credit report.
Heath’s advice for new credit card users trying to build up a solid credit history is to pay off your debt every month.
"Avoid loading up a big balance on a single card. Pay your bills on time, every time," Heath says.
More Tips for Building Credit
Apply for credit selectively. Signing up for too many cards may make you appear desperate, which can discourage lenders from issuing credit to you, according to the National Foundation for Credit Counseling.
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.
~ Interview with Anthony Sprauve of FICO
~ Interview with Julie Heath, Director of the Economic Center at the University of Cincinnati
[*updated August 08, 2018]