The financial independence you get as a young adult is both exciting and challenging. For many young people, living on their own and choosing how to spend money can be a rush. A big part of financial independence is building good credit. Good credit will help you qualify for loans, auto insurance, rentals, cell phone plans and so much more. It can even affect whether or not you get a job. Unfortunately, it can be hard to build credit as a young adult. The Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) has made it even tougher to build credit when you have none. Luckily, there are some things you can do to build good credit as a young adult. The following are the top ten tips to build credit when you are young.
- Use self-control and take care of your financial future. No matter what else you do to build good credit, it will all be for nothing if you develop bad spending habits while you are young. Spending beyond your means using credit can be a slippery slope, especially when you develop these habits while you are young. Make sure to take care of your financial future by starting with good habits now.
- Capitalize on a parent’s good credit by opening a joint account or line of credit. This practice, known as piggybacking, allows you to boost your own credit by establishing financial ties. Thanks to the Credit CARD Act, people under the age of 21 now must have a co-signer or show proof of independent income to get approved for a card in their own name anyways, so it may not be possible to do so on your own before this time.
- Get a secured credit line. Since a secured credit card is tied to collateral held in a bank account, it is easy to secure this type of credit. This is helpful later, because most creditors will be willing to offer a typical unsecured card after 12 to 18 months of using it responsibly.
- Open a retail card. While they have less of an impact on your credit score overall, retail credit cards from stores like Target or Amazon are easier to obtain than regular unsecured cards. They help you to build credit slowly, but don’t abuse your credit line.
- Shop around for the right credit card for you before signing up. While it may be tempting to take the first card offered to you, finding the right card is important if you don’t want to be hit by hidden costs later. Look for one with a lower interest rate, no annual fees, reasonable credit limits, and clear billing policies.
- Don’t apply for a lot of credit cards at once. If you apply for too much credit in a short period of time, it appears as though you have a need for the money that is desperate. This doesn’t reflect well on a borrower, and your credit score will fall.
- Use your card for small, recurring purchases. If you want to build credit, you neither want to ignore the card, nor use up the balance every month. By attaching the card to a nominal monthly purchase, such as a Netflix subscription or the Internet bill, you ensure that the card gets regular use without letting your spending get out of control.
- Use student loans only for educational expenses and only if you truly have need for them. Student loans hold many young people back financially for years after graduation. While they can build credit when done correctly, you will only hurt your credit in the long run if you run up a big debt, because your debt to income ratio will be out of balance. Keep student loans to the minimum amount needed to finance school.
- Pay off credit cards every month. If you have credit cards truly as a method to build credit only, you should be able to afford the balance each month. Don’t use a credit card to make purchases outside your means. Plus, this way you avoid hefty fees usually imposed on young adults with a short credit history.
- Pay all your bills on time. More and more credit checks are including a look at your bill paying history beyond just loans as required by the FICO score. If you are late on your rent, taxes, or utilities bills, this can come back and hurt your credit score later. Make sure to plan bill payments carefully. Even an unpaid parking fine can do damage to your credit score.
If you follow these ten tips for building good credit, you will be able well on your way to a brighter financial future. Just because you are young doesn’t mean you don’t have a way to build credit. With time and good habits, you can get the good score you need to buy a home or get a loan for your future.
For people trying to improve their credit after bankruptcy, all of these tips can be useful as well. We have helped many people who have experienced debt problems come back from bankruptcy to repair their credit. If you’re wondering what your options might be, contact the Cleveland bankruptcy lawyers at Luftman, Heck & Associates for a free legal consultation today – (216) 586-6600.