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How To Build And Improve Your Credit Score In Your 20s

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Written by Ryan Scribner
Updated on June 13, 2020

One of the most important features of your financial life is your credit score. We are going to help explain how to build and improve credit so you can have a good quality of life and easy access to money when you need it. Your credit score will help you in so many different areas of your life!

So... you’ve seen the commercials about obtaining your credit score, but what, exactly, is a credit score?

I'm sure we all remember the days of "Free credit report dot com! Tell your friends, tell your dad tell your mom!"

It’s actually very simple: your credit score tells lenders how trustworthy you are based on your financial history. Basically, are you worthy of credit or a loan?

But what if you have absolutely no financial history?

No worries. We got your back!

Many younger adults are facing the same dilemma. The good news is this: you can start TODAY to build up a credit history that will set you up for a healthy score tomorrow. While it isn't the easiest thing in the world, it is entirely possible to establish good credit in your early twenties.

That means you’ll be able to secure loans you need for purchases like a car, or a lease to rent an apartment, or eventually, even a mortgage for a house.

Even better, you will get those loans with competitive interest rates rather than having to pay more because lenders aren’t sure you know how to handle money.

A Brief History Of Credit Scores

Let's have a short history lesson, I promise it will be brief!

A FICO score is a type of credit score created by the Fair Isaac Corporation.

Upwards of 90% of top-notch United States lenders use FICO scores. Before FICO scores were in place, the process of getting loans was in slo-mo, and could also be easily unfairly biased.

Flash forward to today, when credit scores give lenders a fast, objective measurement of your credit risk.

Credit scores level the playing field. Factors like your gender, race, religion, nationality and marital status are not considered by credit scoring. So, it is actually a good thing that we have these credit scores in place today!

Thanks to modern day technology, scores can also be delivered in the blink of an eye, helping lenders speed up loan approvals.

Today many credit decisions can be made within minutes.

Even a mortgage application can be approved in hours instead of weeks. Scoring also allows retail stores, Internet sites and other lenders to make "instant credit" decisions.

Credit dings now have a shelf life. Prior to use of FICO scoring, any delinquency on your part could mar your financial history for decades. Now, past credit problems fade as time passes and more up-to-date timely payments will replace them.

What Is A Good Credit Score?

Credit scores generally run with a range between 300-850.

For most people, their score falls between 600 and 750, with a score of 700 or above considered good.

Are you in the 800+ club? you’ve reached the status of excellent credit!

The higher your score, the more likely that you’ve made very good credit decisions. This, in turn can make creditors more confident that you will repay your future debts and fulfill your commitments to them.

You win, they win. No brainer.

Curious about your score? Check it here!

Your FICO score is what most people are referring to when they are trying to build and improve credit. There are ranges of credit scores for example an excellent FICO score is 800 to 850. A very bad credit score is 300 to 599

What if your credit is less than perfect? If you have been irresponsible in the past with credit card use, don't sweat it.

The good news is your credit score can be repaired!

Derogatory marks against your credit are not permanent. Even with a bad credit score, you can still get approved for some credit cards to rebuild your credit and start fresh!

There are also loans called credit builder loans that are designed specifically for building and repairing credit. A bad credit score is temporary, but it will take time to repair!

Who Looks At Credit Scores?

Credit scores are used by lenders, including banks, that provide mortgage loans, credit card companies, and even car dealerships financing auto purchases, to make decisions about whether or not to offer a credit card or a loan.

Beyond that, here are a few lesser known groups that may be checking your credit...

  • Landlords or property managers can check your credit before renting to you
  • Your car insurance company often takes a peek
  • Student loan providers (which is why good credit is important for students!)
  • Employers can ask for credit in the employment screening process
  • Your power utility company can even check it

Needless to say, with so many people potentially checking your credit, having a good score is very important!

How To Build Good Credit

It doesn't take an inordinate amount of time to build up a solid credit history.

According to information from some of the major credit bureaus, you can build an average or good credit score in about a year or two. But beyond that, it can take as much as five to seven years to build an excellent credit score of 750 or higher.

It’s possible to build good credit in just a handful of years, but you would need to open at least a few accounts of each type (loans and credit cards) and be 100 percent devoted to making payments on time.

Keep in mind, the shorter your credit history, the more a single late payment will tarnish your reputation.

And you’re shooting for gold here, not silver.

Most people with credit scores in the top 10 percent (around 800 or better) have at least 10 years of credit history. That’s because the average age of your credit accounts is one of the weightier factors for your score.

The longer your accounts have been open and in good standing, the higher the score.

Factors That Impact Your Credit Score

Here’s a quick overview of factors that are top priority when launching your plan to build good credit:

  • Your payment history. Repeat this mantra: Pay all bills on time. Pay all bills on time. Pay all bills – you get it. A payment that’s 30 days late or more will cause your score to plummet.
  • Best practice calls for paying off the ENTIRE amount owed on a credit card every month, rather than carrying a balance over from month to month. That’s how interest charges rack up quickly.
  • How much credit you are using. Aim to use 30 percent or less of your available credit at all times. If you have a card with a $3,500 limit, by no means should you go crazy and charge $3,499 worth of purchases.
  • The length of your credit history does come into play, but if you’re only in your 20s, lenders aren’t expecting you to have decades of spending history. They know you didn’t start borrowing and paying back money when you were a toddler.

How To Build Your Credit Score

Here are some of the best practices to follow when building credit as a young person. As I am sure you can imagine, the sooner you start the better! So, if you are an 18 year old reading this, listen up! 

1. Become an authorized user.

Beg, bribe, cajole, do whatever it takes to get your name onto Dad’s credit card, because this option allows you to benefit from the age of someone else’s account (and we all know how o-l-d Dad is!)

One quick caveat: Be certain that the primary cardholder (Dad) has an excellent track record of making payments.

You don’t want to hang on the coattails of someone with their own credit woes!

Also, always be certain and get confirmation that the credit card company reports authorized user activity to the credit bureaus. This is what will pop a positive blip onto your score.

You want the activity on the card to spotlight your smart spending as well as Dad’s.

This tip also works for suckering – I mean, convincing - Mom, another family member or even an older friend to let you become an authorized user.

2. Get a secured credit card.

A secured credit card is a type of credit card that is backed by a set money payment used as collateral on the account. You must supply this collateral in advance. Secured credit cards are a good way to go for young adults with limited credit histories.

The deposit made to open the secured credit card account serves as collateral and is generally only used if the cardholder defaults. The collateral makes a secured card different from standard or unsecured cards, which require no such deposit.

In other words, you will need to make payments on your purchases monthly; they do not automatically deduct your deposit/collateral.

Deposits typically start at around $200, but can range as high as $1,000. The credit limit will be set at the amount of the deposit.

For example, a $500 deposit will get you a secured card with a $500 spending limit. They will place your security deposit in an escrow account, which "secures" the card.

Secured credit cards are issued by nearly all of the leading credit card lenders. And yes, these cards still require a standard credit application.

Secured cards are part of a major payment processing network including Visa, Mastercard, American Express, or Discover. Therefore, you can use them just like a standard credit card. It won’t have any indication on it that it’s a secured card. They look exactly the same.

Secured Credit Card Structure And Terms

A secured credit card functions in the same way as a standard credit card. You can use the card anywhere that accepts the card brand, and make purchases up to your card’s maximum credit limit.

Cardholders also receive monthly statements showing their end-of-period balances and the activity on the card during the specified month.

If you go the route of a secured credit card, you need to know it functions like a standard card in that you need to make payments monthly. You will have the option to pay a minimum, or to pay more monthly.

Best practice calls for never paying the minimum! Always pay off the entire bill at the end of the month when it is due. Otherwise, heavy interest rates will kick in.

Secured credit cards are typically used by people who won’t qualify for a traditional, unsecured card. They are a means to an end. The end goal is to build a solid credit history. If used carelessly, and if you default on a payment, the polar opposite will happen: your fledgling score will be marred by delinquency.

How Does It Work?

The only difference between a secured card and an unsecured card is that secured cards require collateral. The bank will hold onto the deposit, which protects the bank against losses in the event that you cannot repay the balance. However, the purpose of this balance is not to pay down the balance. You are going to make your own on time payments.

You need to make payments on a secured card just like any other credit card. Failing to make payments on time will result in negative marks on your credit report. Collection agencies could also chase after you for any amount you owe in excess of your deposit amount.

People in their 20s usually apply for secured credit cards to improve their credit, but again, keep in mind that your credit score can be damaged if any delinquencies crop up. Typically, secured card lenders will use your deposit as reserve collateral only if you default. But if you miss payments, lenders will report it. This is something you want to avoid at all costs!

If there is a consistent positive payment history on the card, secured card lenders may even increase your credit limit over time. This is something that should be a goal!

It’s also top priority to ensure the secured card lender reports to all three major credit bureaus, helping you build credit for free -  as long as balances are always paid on time and in full. More good news: there's no way to distinguish between a secured and unsecured credit card on your credit report.

How To Find A Good Secured Credit Card

There are many secured credit card products on the market, and a good place to start your search is with your own bank, as you may be able to link a credit card to your checking account, making the billing process much easier.

Of course, you should certainly compare your bank's card with several others to see which has the most rock bottom fees and interest rates, in addition to any other perks offered.

Here is a trusted resource for selecting your first credit card.

Many secured credit cards will take a look at your account after a certain amount of time goes by, and they will decide if they can convert an unsecured card and have your deposit returned. As an alternative, once you feel that you've established credit, you can apply for a separate unsecured card.

A traditional unsecured card will generally have higher credit limits, but keep in mind, you should curtail your spending to around 30 percent of your credit limit or it will cause a ding on your report. Lenders want to see responsible buying and full, on time payments. They hope not to see you blow out your credit limit in one weekend getaway. It’s always a smart move to use credit for the things you need – clothes, gas, work supplies – rather than things you simply want, such as dinner out on the town.

Tips For Choosing A Secured Credit Card

  • What should you look for in a competitive secured card? No annual fees or maintenance fees are an important feature. Many secured cards have fees, and many offered by smaller issuers carry fees that can add up to an astonishing $200 or more per year.
  • If you travel frequently, there are some exciting travel-oriented sign-up bonuses, as well as some excellent ongoing perks offered by certain credit cards. These include bonus airline miles, incidental fee reimbursement, free checked baggage, and airport lounge access.
  • On the other hand, if you don't travel much, you may be more interested in a credit card that offers cash-back rewards. Some cash-back cards offer extra rewards in specific categories (such as gas stations and grocery stores), while others offer a single cash-back rate.
  • Credit card interest can be high -- the national average rate is around 15 percent, and many cards charge significantly higher interest than the average. If avoiding interest is a priority to you, there are credit cards with 0 percent introductory Annual Percentage Rates (APR) , and many of these are good for well over a year and have no annual fees.

3. Get a cosigner.

Ok, so failed on the scheme of becoming an authorized user on Dad’s credit card? Guilt him into this option then.

Take out a small loan, say for a standard grade preowned vehicle, and ask that loving family member (who already has good credit) to cosign for you.

A cosigner is simply someone who agrees to be responsible for the loan if you stop paying your bills for any reason.

Which, of course, you won’t do.

Most financial institutions will approve a loan for somebody with no credit history IF there is a cosigner boasting a stellar score on the application.

But keep in mind, you stand to put your dad’s credit score in the toilet if you default on the loan.

What does default mean?

It means you – gasp – stop making payments entirely. Let us say this one more time: If someone cosigns a loan for you and you don’t make timely payments, your cosigner’s credit will suffer along with your own.

If you default on the loan, your cosigner is legally responsible to repay the debt. This situation has ruined plenty of close relationships and broken up even the best of friends.

Proceed with caution, and avoid awkward conversations at Thanksgiving dinner!

4. Take out a student loan.

You’ll start building a flourishing credit history as soon as you open a student loan account.

Every type of student loan, including private, federal and refinance loans, appear on your credit report, and eventually count toward your burgeoning score.

Borrow federal loans first, since they have better borrower protections, like repayment plans strongly based on your income, as well as forgiveness sub plans.

More good news: Most don’t even require a credit check.

For starters, fill out the Free Application for Federal Student Aid (FAFSA) to get your application rolling.

Private student loans are based on credit, so most undergrads need a cosigner to qualify.

Keep in mind that the loan will appear on both your credit report, as the student, and the cosigner’s simultaneously. Before you take any steps towards applying, shop around. Compare multiple loan options to get the lowest interest rate you can possibly qualify for, then go for it.

After you’ve gotten the diploma and scarfed down the graduation cake and the loan has aged a bit, you can expect to see a score in the 600s in most cases.

That’s the time to refinance your student loan to get a lower monthly payment and/or a lower interest rate.

It also merges multiple loans into one main account. This will also give your score a boost, because you will have fewer accounts with open balances.

5. Take out a credit builder loan.

Peruse the sites of local community banks and credit unions to see the terms they offer for credit builder loans.

This loan works by stashing away the money you borrow in a savings account.

When you take out a credit builder loan, the money you borrow sits in a savings account, which you’ll have access to at the end of the loan term.

You’ll need income to show you can afford the payments, so choose a low loan amount.

As you make on time payments toward the loan, the financial institution reports that activity to the credit bureaus. You’ll end up with better credit and some money saved, making it a win-win.

When your score reaches the mid-600s, you can apply for a traditional, unsecured credit card.

If you’re still under 21 at that time, though, you’ll also need to prove that you have a steady income from a full time job.

6. Open a student credit card.

Student credit cards are designed for young people looking to obtain their first line of credit.

This can be a much better option than those high interest store credit cards that the cashiers may lure you in to!

Typically, a student credit card has minimal or no cash back rewards. It is designed and is set up to help you build credit. It isn’t a secured card, but it is very similar. The credit limit is typically a lot lower than a traditional cash back credit card.

This can be a great option for students looking to enter the adult realm by using a credit card RESPONSIBLY!

I repeat, responsible use of credit cards is the most important part. Buy your gas on your credit card and pay it off monthly, or even weekly!

Ready to get started? Apply for a student credit card here!

7. Talk to your bank.

If you've had a long-term checking or savings account and kept the balance steady, consider applying for your first credit card at your bank. You’re a known risk to your bank. This works well to your advantage by upping your chances of getting a credit card application approved. Of course, it should go without saying that your bank account’s history should be free of overdrafts, otherwise known as bounced checks.

You can apply online, or take the high road and go visit your local bank branch to meet in person with a customer service rep. They may have more authority to get your application approved in a more timely manner.

3 Major Credit Agencies

The major credit reporting agencies are TransUnion, Experian and Equifax.

They collect and disseminate info on more than a billion people and businesses across the globe.

These credit reports include 4 facets of information about you:

1. Identifying information.

These are the general facts about you as an individual, your vital stats: name, address, social security number, birthday.

This is used only to ID you! It doesn’t come into play when putting together your credit score.

2. Credit accounts, also known as trade lines.

These are all your current and past credit accounts, reported by your lenders and creditors.

These are your credit cards, mortgages, student loans or auto loans. They get right down to the nitty-gritty, such as the date you opened the account, your credit limit or loan amount, the account balance, and your payment history.

3. Credit inquiries.

These are the various companies that have pulled a copy of your credit report, sometimes known as an “inquiry.”

There are two types: “soft” inquiries and “hard” inquiries.

“Soft” inquiries could be your own peek at your credit history, inquiries by companies extending you preapproved offers for credit cards, or inquiries made by your current creditors taking a look at your credit (aka account monitoring). “Soft” inquiries can only be seen by you, not potential lenders or creditors.

“Hard” inquiries happen when a potential lender opens your credit history after you’ve applied for credit, maybe a new loan or credit card. These can sit on your credit report for up to 24 months. While hard inquiries do impact credit scores, soft inquiries do not.

4. Bankruptcies and collections.

Anytime you’ve been – gasp – bankrupt (this will never happen to you, right? Right?) or had past due accounts turned over to collection agencies…. these will also be listed on your credit report.

Be forewarned, open accounts with doctors, hospitals and even cable or utility companies could also be part of your credit report. So be smart, pay off your debts before they come back to bite you!

What Is Used To Calculate Your Credit Score?

Now that you have a general understanding of credit scores, here are some meat and potatoes about the types of info used to calculate your score.

First, payment history.

Payment history is by far the most important factor in credit scores.

It is top priority to pay your bills on time, every time. Any late payment is going to have a huge impact on credit scores.

Your payment history accounts for about 35 percent of a credit score.

Second, credit utilization.

Utilization, or the amount of your credit limit versus how much you’ve used.

This is the second most important criteria in credit scores. You never want a balance to be higher than 30 percent of the credit limit on a single credit card.

In other words, if your ceiling is $5,000 on a specific card, keep your balance under $1,500.

In fact, the lower the utilization, the better it reflects on your score.

And remember to pay balances off in full to sidestep interest charges.

People with the most stellar credit scores have zero late payments and utilization rates of less than 10 percent.

Your utilization rate accounts for about 30 percent of your credit score. These two factors weigh in at almost two-thirds of your score.

Paying your bills on time, every time, and keeping your balances low on your credit cards are the foundation of your credit score.

But wait, there’s more!

Third, credit history.

Length of credit history translates to the number of months or years each of your accounts has been open.

It also takes into account how long it’s been since you used specific accounts.

A longer credit history can increase your credit score.

Length of your history represents about 15 percent of your FICO score.

Fourth, recent credit inquiries.

Recent activity looks at how much new credit you’ve applied for in the past handful of months.

Applications for credit show up as new inquiries. Recent activity that comes into play also includes paying off any of your accounts, and whether account balances have gone up or down significantly.

Recent credit accounts for 10 percent of a FICO score.

Fifth, credit mix.

Credit mix refers to the types of accounts you’ve accumulated, such as mortgages, credit cards, auto loans, and other installment loans.

Having a thriving variety of credit types can help increase your score somewhat, but don’t go crazy and apply for several accounts all at once to try to improve your credit mix!

That rash move will probably do more harm than good because of the spike it will make in your recent credit activity.

Make a vow to use credit judiciously, and you’ll gradually have a good mix of credit types over time.

The mix of various types of credit is 10 percent of a FICO score.

How Rent Payments Can Improve Your Credit Score

If you’re a tenant, there’s more good news: you can use your monthly rent payments to improve your credit score dramatically.

If you’ve been a renter, your landlord has had the right to report you to credit bureaus for late payments, which is a powerful position. But even if you paid on time, every time, that good track record didn’t register on your credit score.

Now, there’s rent reporting through sites like RentTrack.

Set up an account with RentTrack and pay your rent online, then watch your score build with all three credit bureaus.

According to the site, on average, scores increase by 51 points.

Plus, renters with no credit see an average score of 660 after reporting their rent payments.

Credit Score And Car Insurance

It’s a formula that won’t make you happy, but is in fact a reality.

Car insurance companies use your credit history to figure out the odds that you’ll file a claim.

But wait... what do the two have in common?

According to recent studies, drivers with low credit scores have a track record of filing up to 40 percent more claims!

No wonder they shy away from taking that risk and issuing a policy.

But if and when they do grant a policy, it’s going to come with a hefty price tag attached.

Estimates show people with low scores pay anywhere from 20 to 50 percent more on vehicle insurance as compared with those boasting better scores.

Ouch.

Remember, there are many other factors in determining your car insurance rates, for example, driving history, the type of vehicle, where you live and a long list of other variables that may be beyond your control.

As far as your credit history, well, that’s in your capable hands.

This also applies to leasing a vehicle.

The minimum most car dealers will accept is a score in the lower 600s, so that’s something to aim for.

If you have not yet established credit, dealers will likely want a higher than usual down payment and will charge a higher interest rate.

By the same token however, on-time payments will drive your score higher, so this can be a good thing.

Are Retail/Store Credit Cards Good?

Once you’ve built your credit history and are ready to drive in the fast lane... be very careful with retail store credit cards.

These are frequently the card of choice for novices who lack fundamentals of managing credit.

Stores offer these cards at every checkout in every store because they benefit the company so hugely.

They have high interest rates, and worse, encourage binge shopping that quickly erases that "20% off" or similar perk for applying.

They’re enticing and easy to get because they generally have lower credit limits than major credit cards. What does that mean? It means you’re more likely to get the rubber stamp of approval even with scant credit history.

Our advice: don’t be lured in!

If you use them the right way, store cards can be a good part of your overall balanced monthly budget. Some even hand out hefty perks, such as cash back, air flight miles or even nifty gifts like pop-up lanterns and flannel blankets.

The problem is, most people are irresponsible with store credit cards. 

It is often too tempting to fill your shopping basket with merchandise, pretending it is a second Christmas! This is especially true for young people who are new to credit cards.

Credit Score Tips

  • Just as important as that stamp of approval for a loan is what’s in the small print: the terms of the offer. Terms include the whether the interest rate will blow your mind, or if the down payment is staggering.
  • Pay off every credit card in full when it’s due! Never make a minimum payment, ever.
  • You will want to secure a loan with the lowest possible interest, and if you’ve hit a home run with a credit score in the 800s, you’re in a much better position to negotiate.
  • Credit “dings” only have a temporary impact on your score. Before FICO scoring was available, any late payment on your part could show up on your financial history for decades. Now, past credit mishaps fade as time goes by. Luckily, more updated and on-time payments will replace them, and all will be forgiven.
  • You can build an average or good credit score in about a year or two. But it’s not that easy all the way around. It can take as many as five to seven years to build an excellent credit score of 750 or higher.
  • The shorter your credit history, the more a single late payment will cause a ding in your score.
  • Applying for a store card makes sense if you are working to build your credit because you can be more easily approved for a lower ceiling.
  • If you must take out a retail store card, make small purchases and pay off well before penalties and interest start stacking up.
  • Be forewarned, open accounts with doctors, hospitals and even cable or utility companies could also be part of your credit report. So be smart, pay off your debts before they come back to haunt you!

Final Thoughts

Remember that credit cards are not the root of all evil. They are a tool that you should use responsibly. 

Responsible credit card use will improve your credit score resulting in benefits like cheaper car insurance and lower rates on auto loans.

For those who enjoy traveling, some credit cards offer great rewards like airline miles on purchases.

Credit cards are designed for you to misuse them.

Credit card companies want you to rack up a CRAZY high balance that you are paying high interest on. By knowing how to play by your rules, not theirs, you can reap the benefits without paying them a penny in interest!

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