As a young adult entering post-high school life, knocking at your 20s, building credit may not be at the forefront of your mind. However, establishing good credit is crucial for various future endeavors, such as securing car loans, renting an apartment, or even applying for specific jobs.
This blog post will explore seven key steps to building credit:
1. Understand the Basics:
Credit is a measure of your ability to borrow money and repay it over time. When you borrow money, institutions such as banks and lenders assess your creditworthiness based on your credit score and history.
A solid credit score typically ranges between 700 and 850, with higher scores indicating lower credit risk.
2. Obtain a Secured Credit Card:
A secured credit card is an excellent starting point for young adults with no credit history. Unlike a traditional credit card, a secure credit card requires a cash deposit that serves as collateral for your credit limit.
By making timely payments, you gradually build a positive credit history, eventually enabling you to upgrade to an unsecured credit card.
3. Make Timely Payments:
One of the most critical factors affecting your credit score is paying your bills on time.
Late payments can be reported to credit bureaus and have a detrimental impact on your credit score and creditworthiness. Set up automatic payments or reminders to ensure you never miss a due date.
4. Keep Your Credit Utilization Low:
Credit utilization is the percentage of credit you use compared to your available credit limit. In simpler terms, avoid overspending. Just because you are approved for a credit limit of $1,000 does not mean you should spend all of it.
It is recommended that you maintain a credit utilization rate of less than 30% to keep a good credit score. To achieve this, you should practice responsible spending habits and request regular credit limit increases.
5. Diversify Your Credit Portfolio:
Having a mix of credit accounts, such as a credit card, a student loan, or a car loan, can demonstrate your ability to manage different types of credit responsibly. A well-rounded credit portfolio can enhance your creditworthiness and boost your credit score.
6. Monitor Your Credit Report:
Regularly checking your credit report allows you to identify errors or potential fraud promptly. Federal law entitles you to a free credit report annually from each of the three major credit bureaus: Equifax, Experian, and TransUnion.
Monitor your report to ensure its accuracy and address any discrepancies promptly.
7. Engage in Credit-Building Activities:
If you’re not yet ready for a credit card, consider alternative credit-building activities. Becoming an authorized user on a family member’s credit card, applying for a credit-builder loan, or using a rent-reporting service can help establish your credit history.
Building credit as a young adult after graduating high school is an essential step toward financial independence. Remember, building credit is a gradual process that requires patience, discipline, and responsible financial habits. By following these steps, you can pave the way for a healthier fiscal future and open up numerous opportunities along the way.
Here are a few recommended books that can provide further guidance and insights about building credit and managing personal finances as a young adult:
1. “The Total Money Makeover” by Dave Ramsey: This book offers practical advice on managing money, paying off debt, and building wealth. It provides a step-by-step plan for financial freedom, including strategies to improve credit and gain control over your economic life.
2. “Credit Repair Kit For Dummies” by Steve Bucci: Geared towards beginners, this book offers a comprehensive guide to understanding your credit report, improving credit scores, and dealing with credit issues. It provides actionable tips and advice to repair and rebuild credit effectively.
3. “Financial Literacy for Young Adults Simplified” by Raman Keane: This book is a comprehensive guide that breaks down complex financial concepts into easy-to-understand language, helping young adults navigate their personal finances with confidence.
4. “I Will Teach You to Be Rich” by Ramit Sethi: This book focuses on helping young adults navigate the complex world of personal finance. It covers topics like credit cards, investing, and automating finances, providing a step-by-step approach to building wealth and financial security.
5. “Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend” by Jonathan K. DeYoe: This book explores the emotional and psychological aspects of money management. It offers insights on building credit, managing debt, and adopting mindful financial practices to align your values with your financial goals.
