Sooner than you might realize, your credit score will start to matter.
A strong credit score can be the difference between qualifying for an apartment, a low-interest car loan, or getting lost. So, to have credit at the ready when you need it, now is the time to start building a good and long credit history.
There is more than one way to set up credit, and it can be as simple as reporting ongoing bill payments to the major credit bureaus. But keep in mind: Building credit takes diligence, especially since not making payments can damage your score for years to come.
What is credit and why is it important?
Your credit score is a number usually between 300 and 850 and is calculated based on how reliably you have paid past debts, such as credit card bills. Lenders use your credit score to predict how likely you are to pay off debt.
Your credit score helps determine which loans you can take out, the interest you’ll charge, which credit cards you can qualify for, and which property you can rent. Your employer can check your credit history. Having a good credit score can save you money later, mainly through lower interest rates when securing a loan.
If you are starting with no credit history, you are not alone. In the United States, nearly 40% of people ages 20 to 24 have little or no credit history for a degree, according to the Office of Consumer Protection and Finance. Unfortunately, the same applies to approximately 20% of the population.
Building your credit may seem difficult if you haven’t thought about it before, but there are many strategies to use, even if you’re just starting out. Start by establishing good debt management habits, such as not taking on more debt than you can handle, says Brittany Molica, a certified financial planner in Chapel Hill, North Carolina. Missing payments will damage your score and can become a burden when you need to borrow money in the future.
“Having good habits to always pay your bills is really important,” Molika says. “You don’t want to get out of a hole of all kinds of credit card debt you’ve accumulated, especially starting early.”
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Credit Cards – Alternative Cards
Credit cards can be a great tool for creating credit, but they can also damage your results if you take on more debt than you can handle.
If a parent or other trusted person in your life has a high credit limit and a long history of making timely payments, you can become an authorized user of their account and benefit from their good credit. This is one of the easiest ways to extend your credit history, says Blaine Tedderman, a certified financial planner in Arvada, Colorado.
Becoming a CPA will also affect your credit utilization rate, or the amount of money you owe to lenders divided by your total credit, which can help with your credit score.
If you have your own income, you can apply for a credit card when you are 18 years old; Otherwise, you have to wait until you reach the age of 21. A secured credit card is usually the best credit card to start with. Cash deposit supports these cards, and since the credit card company can take that deposit if you miss payments, people with short or poor credit history can qualify.
The deposit you have to make to get a secured credit card can be a burden, and if that’s the case, an alternative card might be better for you. These cards use income and bank account information to determine your credit eligibility rather than your credit score.
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If you live independently, payments for rent, utilities, and phone bills can be reported to the credit bureaus. So paying those bills can build your credit if they are on time and you report them.
Unlike credit card payments, these payments are not reported automatically and may require a third party service, such as Experian EXPGY,
Reinforcement, to make the credit bureaus aware of your payments.
Remember that these services sometimes incur a fee and reporting bill payments may not always affect your credit score; Alternatively, it may only appear on your credit report.
Making regular payments on loans can also help you build your credit. And even if you don’t have any credit history, there are some loans available.
Credit building loans rely on income rather than credit for approval. If the loan is approved, it will be deposited into a bank account and will be available once paid off. Your monthly payments are reported to the major credit bureaus.
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Student loans are another loan that you can use to build your credit when you’re just starting out. Federal student loans do not require credit to qualify, while most private student loans do. Paying off your loans will help you grow your credit history, and you can start while you’re in school by making only interest payments.
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Colin Beresford writes for NerdWallet. Email: firstname.lastname@example.org.