For many young adults, building an excellent credit score can be a frustrating thing. Some may have made it with flying colors in the credit score game, but others just seem stuck, unable to figure out how it works. They know that having a good credit can open great financial possibilities to young adults who are just starting out with life. Yet, it doesn’t seem easy to come by. Fact is, there’s no element of mystery involved in your credit score. You can simply follow what those high flyers do to take your credit score from bad to good to excellent. What are they? Let us give you a walk-through on the art of building a great credit score.
Build your credit history
This is a Catch-22 for many, like getting a job that requires experience but you can’t get an experience without a job. It’s hard to get credit when you don’t have a credit history because lenders do not know “who” they are dealing with. Will you pay your dues, or are you quicker to walk away from them than they are to send you your statement of account? Some 20somethings, probably due to a low income brought by lack of experience in their jobs (and it isn’t their fault), are too debt averse. They never take on debt or they take on too little debt. The result is a non-existent credit history or a thin credit file. The key is to take on debt that you can manage so you can build credit over time. The most convenient way to get started now is to apply for a credit card and use it wisely.
It’s good to start building an excellent credit score early
The average age of your open credit lines is a factor in the computation of your credit score. The earlier you get credit and the longer you keep them open, the better. Credit card companies in the U.S. offer credit cards even to college students. This is an opportunity for you to start early and establish a solid credit history. You may also ask your parents to co-sign an account with you to jumpstart your credit history. Of course, co-signing an account has to be done with the understanding that you can potentially damage their credit score if you aren’t responsible enough in using credit. Unfortunately, many youngsters simply take their credit cards on shopping sprees and end up with huge credit card debts on top of their student loans. This is no way to build a great credit score!
If you could keep your balance low relative to your credit limit (known as credit utilization rate), then you’ll get the nod of approval from your creditors because it has 30% weight on your credit calculation. If you’re young and have low or no income yet, you’ll have little confidence in swiping your credit card. The positive thing about that is you limit your charging to as little as possible. As time goes by, however, and you’ll earn a bigger paycheck, you’ll get more temptations to use more credit and max out your cards often. This is a red flag for creditors even if you pay on time and could be the reason why your credit took a hit despite longer relationship with your creditor.
Pay your bills on time
Doing so is the mark of a responsible young adult. You borrowed something and gave it back: what’s a better measure of responsibility and trust by your creditors? Your creditors will be happy and it will reflect on your credit score. In fact your payment history makes up 35% of your overall credit score. If you build a history of on-time payments, you have a good chance of getting an A+ in your credit report. Now, on-time payments don’t mean on-the-dot payments. If you do it that way, you’ll likely forget your dues which might cause your credit score to shed some points. Instead, why not take advantage of online banking to automatically pay your bills? Or if you’re not comfortable logging in your banking password, use your smartphone to remind you on a set date every month to settle all your obligations. Update: FICO will be releasing its new credit scoring model (reportedly this fall) which can create a major change in how your score is calculated. One major change is that debts that are paid off or settled after they have been sent to collections will no longer count against credit scores. However, this doesn’t mean you can just let your accounts go to collections. Paying on time is still the best way to go.
Don’t apply for more credit than you need
Applying for more credit will only trigger hard inquiries from creditors and too many inquiries can take a bite off your credit score. What do you need another credit for? Do you just like more cards to make your wallet appear thicker? Ask yourself first the reason why you need another credit. Needing more and more credit could mean you might be taking on more and more debt that you can handle. The problem might not be a lack of credit at all but too much dependency on credit. So there you have it. As you might have noticed, there is no secret formula or mystery to solve to build an excellent credit score while you are still young. Apart from starting early, there is actually no difference if you started late. And more important, there’s still no substitute to the good old discipline in handling credit.