A lot of basic “adulting” involves a credit score. Renting an apartment? The landlord will want a credit score. Buying a home? Mortgage lenders will need to see a credit score. Getting a car? Credit score. Applying for a private student loan? You get the point.
Credit scores affect the financial part of people’s lives. As folks age and make bigger purchases, they are required to show their score more often.
Young people may think they don’t need to worry about their credit score in their late teens or early 20s. They aren’t planning on buying a house or fancy new car anytime soon, right?
There are a couple of problems with this line of thinking. First, plenty of young people do have to show their score. Are they applying for a private loan to put themselves through college?
Their credit score will help determine how low of an interest rate they qualify for. Are they trying to move off campus or rent their first post-college apartment? A low or non-existent score could lead to their application being denied.
Wondering how to start building credit with a low score—or even how to build credit with no credit score? A few simple steps can set young people on the path to success.
Obtaining a Credit Card and Using It Responsibly
Don’t own a credit card yet? Getting a card is a simple way to start establishing credit. People who already have a card with a balance might want to focus on paying it off instead of applying for a new one, though.) However, it’s crucial to use a card wisely—otherwise, cards can do more harm than good.
People may want to consider applying for just one card, not five. And keep in mind that just because someone has a card doesn’t mean they have free money. Opening one new line of credit and using it responsibly is a good way to build credit.
While some people out there believe credit cards are the root of all evil, if used correctly, they can boost credit scores in multiple ways. The most common credit score model is issued by Fair, Isaac and Company, aka FICO. People’s FICO scores are comprised of five factors:
• Payment history: 35%
• Amount owed: 30%
• Length of credit history: 15%
• Credit mix: 10%
• New credit: 10%
Credit cards can be an effective tool in a new credit builder’s toolbox. When someone uses a credit card responsibly, this can potentially have a positive effect on all five FICO categories.
Payment history: Making monthly payments on time (even just minimum payments) can help people’s credit scores. As they make consecutive monthly payments, their scores should gradually increase—as long as they remain responsible with their finances in other areas of their lives.
Amount owed: Everyone has something called a “credit utilization ratio,” sometimes referred to as a “debt-to-credit ratio.” This is the ratio of debt they owe versus how much debt they can owe.
Credit cards have credit limits. Let’s say Dana’s credit limit is $10,000, and she owes $5,000 on her card. Her credit utilization ratio is 50%. If she pays off $1,000 and only owes $4,000, her ratio is 40%. The lower the ratio, the better—that’s why older adults often lecture teens and early 20-somethings to pay off their card balances in full. A low ratio means better things for borrowers’ credit scores.
Length of credit history: The longer people have a line of credit, the better it is for their score. Ideally, someone would open their first credit card and keep it for years while making payments on time and keeping their balance low.
Those who already have a credit card but have racked up debt may want to think twice before canceling their card for this very reason—they might be better off working to pay off the balance aggressively and keeping the card for longer. But if they want to remove the temptation to keep charging the card, they can cut up the credit card like Rachel does in Friends. This way, the card isn’t sitting in their wallet, but their line of credit is still open.
Credit mix: FICO likes it when people have multiple types of debt. A recent college graduate’s only debt might be student loans. To improve their credit mix, they might consider getting a credit card as well.
New credit: When someone applies for a card, the issuer checks their credit score to determine whether they’ll be approved and what the interest rate should be. This is known as a “hard credit inquiry.” A bunch of hard credit inquiries in a short amount of time looks bad for a credit score, especially for someone whose score is already low. Besides, by limiting themselves to only one card, young people who are still learning the ropes of establishing credit might be less inclined to spend recklessly.
Considering a Secured Credit Card
Young people with low credit scores (or even no scores at all) may not be accepted if they apply for a top-notch credit card. Another option is to apply for a secured credit card. This type of card is meant specifically for people who want to build credit.
To use a secured credit card, people make a cash deposit to back their credit card account. The deposit amount becomes their spending limit. For example, John makes a $100 deposit when he receives his secured credit card. He can charge up to $100 to his card before paying it off. As long as he makes payments, he can keep charging to the card as long as the balance doesn’t exceed $100. If John doesn’t make payments on time, the issuer can take money from his cash deposit.
Secured cards benefit both the consumer and issuer. The consumer can build credit, and a cash deposit makes it less risky for the issuer to do business with someone who hasn’t yet proven that they can make payments on time.
What happens to that cash deposit down the road? If all goes well, people should get back their money. Many reputable credit card issuers offering secured credit cards give consumers the option to upgrade to a regular “unsecured” credit card once their credit score improves. When the user upgrades, they should receive that deposit back.
People researching secured credit cards may want to look for issuers who will let them transition to an unsecured card. This can simplify the process of switching to a regular credit card. Plus, the borrower won’t have to hang onto an unnecessary card or cancel the secured card later—which can help the “length of credit history” part of their FICO score!
Becoming an Authorized User on a Parent’s Credit Card
Some people may not trust themselves to use a credit card without racking up a ton of debt. Or they have the exact opposite fear—they might never use it, so they wouldn’t be making payments to boost their payment history. The latter fear may be the case for young people who are still receiving financial help from their parents and therefore don’t have many expenses to put on a card.
In either of these cases, young people might consider becoming an authorized user on a parent’s credit card. The parent can call the credit card issuer to officially put their child’s name on the card.
Young people should only add their name to a parent’s card if the parent has a high credit score and solid financial habits. If the parent starts to miss payments or accumulate a ton of debt, it will negatively affect the authorized user’s credit score.
Establishing credit through a parent’s card can help someone acquire a decent score before getting their own credit card. If they have a good credit score prior to applying for their first card, they might be approved for a harder-to-get card at an attractive interest rate. After receiving their own card, they might decide to remove their name from the parent’s card so they can have sole control over their personal credit score.
Paying Bills on Time
Okay, we’ve established that making monthly credit card payments positively contributes to the “payment history” part of a credit score. Credit cards aren’t the only things people can pay on time, though. Making timely payments on things like car loans or student loans also help.
Certain bills don’t show up on credit reports, such as cell phone bills and insurance payments. While paying those bills doesn’t improve people’s credit scores, skipping payments can certainly hurt their scores. When people default on their payments, their credit scores can take a major hit. So it’s important for people to pay all their bills—even the ones that aren’t on their credit reports.
Taking out a Credit-Builder Loan
Just as secured credit cards exist for people trying to build credit, there are special loans for this purpose, as well. These are called credit-builder loans, and they are usually offered by smaller banks and credit unions.
When people take out credit-builder loans, the loan amount is held in a separate bank account until the borrower pays off the full amount. By making payments on time, the “payment history” part of people’s scores should gradually improve. Borrowers do have to pay interest on the loan, and the percentage will depend on the lender. But there’s a huge bonus: Once people pay off the loan, they get to pocket the full loan amount and the interest they’ve paid. Not only do they walk away with a better credit score, but they now have money to put toward their emergency fund or student loan payments.
While people don’t need a good score to be approved for a credit-builder loan, they do need proof that they earn enough money to make monthly payments on time. They may need to provide documents such as bank statements, employment information, housing payments, and more.
Considering taking out a credit-builder loan? When shopping around, it is a good idea to keep an eye out for factors like APR, required documents, term length, loan amount, and additional fees before making a decision.
Establishing credit is the perfect example of “slow and steady wins the race.” People shouldn’t get discouraged when their credit score doesn’t surge after two months of making payments on time. And if they do get discouraged, they shouldn’t give up. The important thing is to continue making payments on time and using a card responsibly. The reward will come.
Recommended: How Long Does it Take to Repair Credit?
Keeping Track of Your Credit Score
Many people have no idea what their credit score is. By regularly checking their score, they can know exactly where they stand and how much progress they need to make to reach their goals.
Some people may be concerned that checking their credit score can lower their score. But don’t worry, only “hard inquiries” affect credit scores. Hard inquiries occur when issuers or lenders check borrowers’ scores to determine whether to approve them for a credit card or auto loan, for example. But when a person checks their own score on a website or app, this is considered a “soft inquiry” and doesn’t affect their score.
Checking credit scores is easy with SoFi Relay. By seeing their spending and credit score all in one app, users might feel encouraged when they notice their payments are actually improving their score, further motivating them to keep their credit score in a good place for the future.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.