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You don’t have to experience bad credit in your 20s. Positive credit habits start with managing your full financial picture. Follow these simple steps to help build credit and maintain a strong credit score.
Why Good Credit Matters
Understanding the power of credit means knowing about your credit score and credit report. While some think having bad credit at some point is a part of growing up, you can avoid this by establishing positive credit habits early. Decide to ditch the bad credit stage many go through in their 20s and instead start early to develop good credit habits and a solid credit history.
A credit score can mean the difference between having your own apartment or sleeping on your friend’s couch because of a bad credit check. Keeping track of your FICO® Score and requesting your free annual credit report are simple tasks, and you will see your credit history in progress.
Know Your Score
The numbers can seem tricky, but here’s the 411 on how to get your credit score. FICO Scores are the most popular type of credit score. This three-digit number gives lenders a numeric summary of your creditworthiness. Low scores reflect a poor credit history and impact your opportunities for building credit, but it is possible to improve your credit score.
There are various places where you can see and/or track your credit scores.
1. Check your credit card company. They often offer free credit score monitoring and credit report options to cardholders through their credit accounts.
2. Look for free credit monitoring apps. If you don’t have a credit card yet, then you can use these apps to track your credit score.
3. Get your free credit scores once annually from each of the top three credit bureaus (Equifax, Experian, and TransUnion).
Review Your Credit Report
Reviewing your credit report annually is a good idea because you might catch errors that may need to be corrected. A credit report details your credit history, including all credit accounts (and how long each one has been open), payment history, credit utilization, credit inquiries, and lender details. Credit bureaus differ slightly in their report formatting and content, which is why it’s important to get a copy from all three each year.
Your basic information is also included, like your previous addresses, names, and employers. Pay close attention. See an address in Hawaii where you’ve never lived? Errors can negatively affect your credit history or signal more serious things like fraudulent activity or identity theft. Information is power, so take charge of your credit report and dispute erroneous data with the appropriate credit bureau(s).
Ways to Build Credit
1. Your payment history matters. Lenders calculate your history of on-time and late payments. As you establish your payment history, the more on-time payments you have, the better your credit score will be. Paying as you go or earlier than your due date is even better. Consider toggling on that autopay feature instead of relying on your memory!
2. Pay your balance in full. You have your first credit card (Yay!), but do you keep a balance or pay it off each month? If you can, pay it off in full. This credit account pro move shows you can handle the amount you’re spending each month, and that you budget responsibly.
3. 30% is the magic number. But if you can’t pay the balance in full, keep your balance lower than 30% of your credit limit. This number is known as your credit utilization ratio. Not maxing out your credit card shows lenders that you use credit responsibly and you’re not strapped for cash.
4. Do your research before applying for a credit card. There are several credit card products promoted as credit-building cards. Finding the right credit card for you requires a bit of searching, but there are some great resources online that allow you to compare features (annual fee, other fees, interest rate, etc.) between several different options.
IMPORTANT: Don’t apply for too many cards at once, though. Credit scoring models flag this activity as an elevated credit risk, and it can temporarily decrease your score. So pick your top three credit card choices, and spread those applications apart!
5. Authorized users count, too. Getting added as an authorized user on someone else’s credit card may help your credit, too. Some, but not all, credit cards will report authorized user activity to the credit bureaus. This method of building credit only works if that person has a good credit score. In short, you are piggybacking on their creditworthiness with their card in your name. If you find someone willing to add you, this is an easy way to start building credit.
Knowing your score, reviewing all three credit reports annually, and building credit by making on-time payments as well as the other strategies outlined above are empowering. Having the right information and acting on it improves your chances for financial success in your 20s and beyond.
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