Establishing Good Credit When You're Young

Finances
Happy young adults establishing good credit by using a credit card responsibly

For many, graduating from college (or simply moving away from home) marks the beginning of a transition to independent living. That kind of freedom can be thrilling — but it also means taking on more responsibility as you work to become financially successful on your own.

Establishing good credit is a great first step toward reaching financial success — and building credit when you don't yet have a credit history is easier than you might think. Here's what you need to know to get started on the right financial foot.

Why Good Credit Matters in Your 20s

Think of your credit score like a transcript. Your grades can help you qualify for scholarships or competitive internships, and your GPA can help potential employers gain an understanding of how you could perform on the job. It's not a perfect measure of your skills and abilities, but institutions may use your GPA to better predict how you could act in the future. Your credit score works in a similar way: It gives financial institutions like banks and credit unions an idea of how creditworthy you are, or how likely you are to manage money well and repay any sums you borrow.

Establishing good credit is important because that number will remain relevant for your entire adult life, and it can either cost or save you a significant amount of money. When it comes to getting loans or qualifying for financing, good credit will help you secure the lowest available interest rate. You pay interest as the fee for borrowing money, so the higher the rate, the more it will cost you to borrow that money.

Good credit can also help you secure things like apartments or a lease in a competitive market. Landlords or property management companies will also check your credit score to see how likely you are to pay your rent in full and on time each month. If many people apply to lease a single home or apartment, the landlord may choose the person with the best credit score.

What Good Credit Looks Like

If you look at your FICO credit score — which you can generally do through a banking or credit card website — you'll find scores range from 300 to 850. Any score under 579 is considered poor. Scores from 580 to 739 are fair to good, while credit scores that fall in the 740 to 799 range are above average. Any score above 800 is considered excellent.

You'll need a good-to-excellent FICO credit score to qualify for most loans and financing, though you may be able to get credit cards with a lower score. And yes, there are other scores in circulation — but FICO is the one the majority of lenders will look at when considering the reliability of your credit.

How to Establish Good Credit While Young

While you may not need to apply for any loans or switch up your living situation right now, you likely will at some point in the future. That's why establishing good credit while you're young is important: Part of what determines your score is your credit history, or how long you've been using some kind of credit.

Getting started is straightforward. It can be as simple as opening a credit card with no annual fee and using it to pay for something you need to buy anyway, like gas or groceries, then paying off the balance in full at the end of each month. That will open your credit file and mark the beginning of your credit history. You probably want to keep that credit card open as long as you can, since the average age of your accounts is one factor that determines your overall score.

Of course, if you have student loans, you've already begun the process of establishing credit. You can continue to build a positive credit history by:

  • Paying your credit card balance in full each month (as mentioned above)
  • Keeping balances on your credit cards to a minimum — try to use 30 percent or less of your available credit at any one time
  • Paying your bills and making any loan payments on time (late payments can seriously hurt your credit score)
  • Avoiding opening and closing lots of accounts, especially in a short amount of time

If you do have student loans, you'll want to consider putting together a repayment strategy and pay those off as quickly as you can. This could save you money, and can also increase your credit score as you go. Avoiding debt in the future will also help keep your score in the good-to-excellent range.

Over your lifetime, a great credit score may save you a lot of money when you achieve big milestones like buying a new car or taking out a mortgage for a house, perhaps allowing you to put that money toward other goals, like saving for retirement. In the meantime, it can help you qualify for things that matter most now, like securing a lease on the apartment you want or qualifying for a credit card with attractive perks. The sooner you start establishing your credit, the easier it will be for you to build up to an excellent (possibly even 800+) score.

IMPORTANT DISCLOSURES

1 Source: LIMRA, a life insurance industry association trade group, January, 2016
2 Source: U.S. Bureau of Labor Statistics (www.bls.gov)

Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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