Having a strong financial base and credit score are essential for young adults. This isn’t an elusive goal; if you take the time to understand your credit score and what it’s made of, it is possible to build a strong credit score. A good credit score helps young adults secure the financial resources they need. Whether it’s to land favorable terms on a car loan or simply because you want to show your good financial sense, having a strong credit score is important.
Understanding Your Credit Score
Before you can build a strong credit score, you need to understand it. The primary component of your credit score is a three-digit number that ranges from 300-850. The higher your credit score, the better. It’s not the same as your credit report, which is a detailed listing of your credit history.
In the United States, FICO, Experian, and TransUnion scorecards have become the industry standard for grading credit scores. According to the FICO credit score model, the following is the approximate scoring range:
• 800-850 is considered excellent credit
• 740-799 is considered very good credit
• 670-739 is considered good credit
• 580-669 is considered fair credit
• 300-579 is considered bad credit
Your credit score is a reflection of how you handle your finances and how well you have managed credit in the past. The main factors that influence your credit score are your payment history, the amount of debt you owe (credit utilization ratio), how long you have had credit accounts, and any new credit accounts opened.
Establishing Your Credit History
One of the best ways to build your credit score is to establish a credit history. If you are just starting out, you may be asking yourself, “How do I establish a credit history?”
It is easier than you might think. Here are three things you can do to start building your credit score:
- Get a Secured Credit Card
A secured credit card looks like a regular credit card, but it is backed by a cash deposit that you make with the card’s issuer. Since you already have the money to back your card, lenders are willing to accept applicants with bad credit or no credit. One important thing to keep in mind when using a secured card is to make sure your spending doesn’t exceed 30% of your available credit.
- Become an Authorized User
If you can’t get a secured credit card, you may be able to become an authorized user on someone else’s credit card account. As an authorized user, you will be able to make purchases that are credited to the account’s primary cardholder. As long as the primary user pays the bills on time and does not overextend their credit limits, your credit score will benefit from this arrangement.
- Get a Credit-Builder Loan
A credit-builder loan is a type of loan in which the money is set aside in an account for you to access once you are able to pay off the loan. Credit-builder loans can help you establish your credit profile because they represent timely payments, which is one of the main factors impacting your credit score.
Maintaining a Healthy Credit Score
After you have established your credit history, there are certain steps you can take to maintain a healthy credit score.
• Make timely payments: This is the most important tip. Your payment history is the most important factor in your credit score, accounting for up to 15%. Make sure you always pay your bills on time, before the due date. Late payments can drag down your credit score.
• Manage your debt: Credit utilization ratio, which compares the amount of credit you are using to your total available credit, affects your credit score. A good rule of thumb is to keep your credit utilization ratio below 30%.
• Monitor your credit report: It is a good idea to take the time to review your credit report and check for accuracy. Mistakes on your credit report can have a negative impact on your score.
• Don’t open too many new accounts at once: Opening multiple accounts in a short period of time can hurt your credit score.
• Keep your oldest credit accounts open: Owing the same amount but having a longer credit history can increase your score.
Having a good credit score is important. It can help you get loans at favorable rates and secure other financial resources you may need. While it’s easy to let your credit score suffer if you aren’t careful with your financial decisions, you can get yourself back on track by taking the time to understand your credit score and determine the best steps for building and maintaining a strong score. With a few small steps, you can be on your way to building a strong credit score.
