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

We at Investing Simple are not financial advisors. While we are sharing best practices, your situation is unique. If you have any doubts, your best bet is to talk to a financial advisor about your personal situation.

Here’s something that doesn’t always come up in everyday conversation: your credit score.

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

For those looking for a bit of nostalgia, watch this video…

It’s actually very simple: your credit score tells lenders how trustworthy you are based on your financial history.

But what if you have absolutely no financial history? No worries. 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.

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.

What Credit Score To Aim For

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. Log in a score of 800 or above, and you’ve reached the status of excellent.

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.

FICO Credit Score Range, Flickr

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.

Just as important as loan approval is what’s in the small print: the terms of the offer. Terms include the rate of interest and the down payment. As you can imagine, you want to secure a loan with the lowest possible interest, and if you’ve hit a home run with a credit score of, say, 820, you’re in a much better position to negotiate.

How Long Does It Take 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.

Here is a helpful video on how to build your credit score in 30 days!

Credit Score 101

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.

5 Tips For Building Your Credit Score

1. Talk your parents into letting you become an authorized user on their credit card.

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!

What you are looking to avoid… (source)

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.

If you didn’t manage to sweet talk the parental units into adding you as an authorized user, go to your bank or credit union for a secured credit card. These require a deposit, which usually runs from $200 to $2000, which becomes, in essence, your line of credit.

As you can imagine, you will need an income to qualify for a secured credit card, but for this type of credit, rules aren’t as stringent as those that apply to obtaining a traditional unsecured card.

Banks and financial institutions that issue secured credit cards have their own rules and regs for where your deposit must be – such as a checking or savings account.

Then – and this is crucial – pay off the balance on the card MONTHLY and ON TIME to avoid late fees and other penalties. Remember, if you’re not showing consistent payments, you’re not building credit, you’re digging yourself into a hole.

Also, do your due diligence and check that reports are made to at least one credit bureau. That’s the only way to ensure your efforts won’t be for naught.

When your score rises into the low 600s, make your best effort to get yourself a conventional credit card. Even though by that time you’ll be playing in the big leagues, keep your wits about you and follow the same best practices for paying off your debt each month to avoid interest and late 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.

Credit Score Mem.jpg
Getting a loan with a BAD score… (source)

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 subplans.

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. 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.

Final Word On Credit Score

One final tip we just can’t NOT share with you: 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.

These cards are offered (read: pushed as a hard sell) 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 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.

But don’t be lured in! If you must take out a retail store card, make small purchases and pay off before penalties and interest start stacking up. Sure, it would be nice to outfit the entire fam in GAP apparel at the holidays, but hold back and just get Dad a nice scarf. You owe him, after all, for the co-sign.

Got any credit score tips or horror stories? Comment below…

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