Why Building Credit Early Is Important
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Building credit doesn’t exactly sound like one of the most exciting things to do when you’re young.
What is it, exactly? Why is it important to “build credit” at a young age? And by young, we mean at least 18, but maybe closer to 21 or older.
Building credit is another way to say that you’re establishing credit. It’s creating a positive credit history that will affect your life for years to come.
It’s much more than using a credit card to buy things.
Build credit while saving money, starting at $25 per month.
- No hard pull
- Automate payments
- Track your credit score
- Reports to all 3 bureaus
- Cancel anytime
The essence of building credit
Imagine building credit as the ultimate strategy game where the goal is to unlock life’s big levels—like getting your first car, renting a cool apartment, or even snagging that phone plan without a massive deposit. It's not just swiping a card for the latest gear or eats. It’s about playing the long game, setting up your future self for the win.
Here's the deal
Every time you borrow some cash or use a credit card and then pay it back on time, you’re showing the world, especially banks and businesses, that you’re good for your word. It’s like earning trust points. The more points you have, the more the financial world trusts you. And with that trust comes some pretty sweet perks, like lower interest rates on loans (meaning you pay less over time) or not having to drop a big security deposit for your apartment.
Why it’s more than just spending
Building credit isn’t about going on a shopping spree. It’s more like crafting your very own financial identity. Every payment you make on time and every responsible use of credit adds to your financial street cred. It shows that you can handle money wisely, which is a big deal to people like landlords, car dealers, and even some employers.
The big picture
So, while it might seem like a hassle or not that important right now, building a solid credit history is like setting up dominoes. Line them upright, and when it’s time to make the big moves in life, everything falls into place way easier. You can walk through doors that might be locked without good credit, like snagging the keys to your first ride without a sky-high interest rate.
In short, building credit is your backstage pass to the cool stuff later on. It’s about making smart moves now so your future self has it way easier.
Why a good start is important
Getting off to a strong start with your credit isn't just a nice-to-have; it's a critical step that sets the stage for a smoother financial journey ahead. While stumbling out of the gate with credit mishaps won't necessarily doom you to a lifetime of financial struggles, the advantages of establishing a solid credit foundation early on are undeniable and far-reaching.
Imagine entering adulthood and finding that many of life’s milestones are within easier reach because of your good credit history. Landing your first job might come with less stress if potential employers check your credit history as part of their screening process, seeing it as a reflection of your reliability. When it's time to move out on your own, a good credit score can simplify the apartment-hunting process, making you a more attractive candidate to landlords and reducing the likelihood of hefty security deposits.
The benefits extend to larger purchases and financial responsibilities as well. Whether buying your first car or securing favorable auto insurance rates, a strong credit history acts like a financial passport, unlocking better terms and lower costs. Similarly, credit cards with lower interest rates and corporate credit cards, essential for work-related travel and expenses, are more readily accessible. This financial credibility also simplifies everyday aspects of life, such as setting up utilities or cell phone plans in your name without additional deposits and easily booking travel accommodations or rentals.
Behind the scenes, a good credit score signals to employers, landlords, car dealers, lenders, insurers, and credit card companies that you're a low-risk individual. This perception opens doors to various opportunities and can lead to cost savings on loans and other financial products. The reason is straightforward: lower risk for them translates to lower costs for you.
For those whose careers necessitate travel, the importance of a robust credit history is even more pronounced. Qualifying for a corporate credit card, often a necessity for booking flights, renting cars, and entertaining clients, relies heavily on your personal credit history. While these expenses are typically reimbursed, the initial trust placed in you to manage this aspect of your professional life hinges on the creditworthiness you've built.
The biggest reason to establish good credit early
But forgot those lower expenses and being approved for apartment leases. The biggest benefit of building good credit when you’re young is to your future self.
Buying your first car with a good auto loan at a low rate is great, but wait until you want to buy a house. Then you’ll really see the advantages of having good credit.
A good credit score can be 1% lower than a fair score when getting a home loan. Improve your score to excellent, and the annual percentage rate could be 2% lower than for someone with a fair score.
A 30-year fixed loan of $200,000 at 2.7% for someone with an excellent credit score would cost $814 per month, and the total interest paid would be $93,057, according to a loan savings calculator at myFICO.
A good credit score would lead to a 3.3% APR for a monthly payment of $880 and $116,916 in total interest paid. That’s almost $24,000 more in interest by having an excellent credit score.
If a score drops to fair, the interest rate would be 4.3%, and the monthly payment would be $992, for $156,984 in total interest. That’s $40,000 more than the borrower with good credit would pay in interest.
Related: Self Credit Builder Review
Build credit while saving money, starting at $25 per month.
- No hard pull
- Automate payments
- Track your credit score
- Reports to all 3 bureaus
- Cancel anytime
How to open your first credit account
Opening your first credit account can be difficult without credit in your name.
One way to do it is to become an authorized user or joint credit card account holder on your parent’s credit card. This will help you learn the credit process, including making a charge, paying the bill, and managing credit on your own someday.
Another way to get your first credit card is to apply for a secured one. You pay the bank a deposit, such as $500, to be used as your credit limit on the card. If you don’t make payments on your charges, the bank uses the deposit.
You can get the deposit back if you close the account and it hasn’t been used to pay for charges you’ve made. Using the account responsibly can lead to the lender converting the card to a traditional credit card account.
A store charge card, such as a card from Macy’s, Kohl’s, or another store where only the company’s card can be used, can also help establish credit.
Building credit
Building a robust credit foundation is crucial for anyone looking to navigate the financial world easily. Understanding the pillars of good credit can transform your approach to managing finances and unlock opportunities that would otherwise be out of reach. Let’s dive into building credit and maintaining a healthy financial profile.
Understanding credit utilization ratio
The credit utilization ratio is a key factor in your credit score, representing the amount of credit you use compared to what's available. Keeping this ratio below 30% is a golden rule; it shows lenders you can manage your credit without maxing out your accounts. For instance, if you have a credit card limit of $10,000, aim to keep your balance below $3,000.
Importance of on-time payments
Your payment history is the most significant component of your credit score, accounting for 35% of the FICO Score calculation. Consistently paying your bills on time demonstrates financial reliability. Late payments, especially those over 30 days overdue, can significantly damage your credit score.
Diverse types of credit
A mix of different types of credit can positively affect your credit score. This might include student loans, car loans, personal loans, and credit cards. Each type of credit showcases your ability to responsibly manage various forms of debt.
Regularly checking your credit reports
Credit bureaus—Equifax, Experian, and TransUnion—compile your credit reports, which form the basis of your credit score. Errors in these reports can negatively impact your score. Thankfully, AnnualCreditReport.com offers free access to your credit reports from each bureau once a year, allowing you to spot and dispute any inaccuracies.
Role of FICO Score
Your FICO Score is a three-digit number lenders use to assess your credit risk. It ranges from 300 to 850, with a higher score indicating better creditworthiness. This score is calculated based on your payment history, amounts owed, length of credit history, new credit, and types of credit used.
Good credit habits
Developing good credit habits is essential. This includes paying bills on time, keeping balances low, and only applying for new credit when necessary. Also, maintaining old credit accounts can help lengthen your credit history, positively affecting your score.l
Impact of late payments
Late payments can stay on your credit report for up to seven years. If you encounter difficulty making a payment, contact your lender immediately to discuss possible solutions. Many are willing to work with you to avoid reporting a late payment.
New credit and its effects
While new credit can improve your credit mix, frequently applying for credit can lead to hard inquiries, which may temporarily lower your score. Be strategic about when and how you apply for new credit, ensuring it aligns with your long-term financial goals.
Free credit and credit-building products
Several tools and products are designed to help individuals build or rebuild their credit. Secured credit cards, credit-builder loans, and becoming an authorized user on someone else's credit card can offer pathways to establishing credit. Always research and choose options that best fit your financial situation and goals.
Continuous learning and adaptation
Building and maintaining good credit is an ongoing process. Stay informed about changes in credit scoring models and financial products. By adapting your credit management strategies over time, you can ensure that your credit score remains a strong asset in your financial toolkit.
Build credit while saving money, starting at $25 per month.
- No hard pull
- Automate payments
- Track your credit score
- Reports to all 3 bureaus
- Cancel anytime
The bottom line
Building credit early is not merely a financial task; it's a strategic move that sets the stage for a future filled with greater opportunities and fewer financial hurdles. Starting your credit journey as soon as you can unlock a world of benefits, from lower interest rates and better loan terms to easier approval for rental applications and lower insurance premiums. This early start gives you a significant advantage in several key life moments, such as purchasing your first home or car, securing your dream job, and easily managing unexpected expenses.
Moreover, developing good credit habits early on—like making payments on time, understanding credit utilization, and managing different types of credit—lays a strong foundation for responsible financial management. It allows you to build a robust financial identity that can support your goals, whether entrepreneurial ambitions, educational pursuits, or personal milestones.
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