When is the best time to start establishing a healthy credit history?
Although your length of credit history accounts for 15% of a FICO® Score, your payment history accounts for 35% of that score. That means even if you might have had credit for a long time, it doesn’t help you if it’s not a good credit history, which is why credit monitoring and awareness are crucial from the first day you begin to build your credit.
If you’re in your twenties and just starting out, here are just a few of the reasons why building a good credit history at a young age is so important:
- Apartment owners thinking about renting to you will be checking your credit profile
- Auto lenders will review your credit when deciding whether or not to loan you money for your first car
- A job with travel may require a credit card for rental cars, airline tickets, etc. Though you may be reimbursed, it’s not uncommon for corporate cards to be personal cards.
Once you start establishing a credit history, credit monitoring is an important part of maintaining your credit profile. Why? Here are two key reasons:
Credit reporting errors.
From incorrect spelling of names to wrong addresses and payment transactions, millions of credit reports contain errors. Some of these errors might affect a credit score and some might not. Either way, credit monitoring can help you discover them so they can be corrected before any potential problems arise.
A 5-year-old… a 20-year-old… a 60-year-old… it doesn’t matter. Identity thieves have no preference. As long as they can steal someone’s personal information and make a profit selling it or use it for their own monetary gain, they’re happy. Credit monitoring can help you find out if your personal information may have been compromised.
Now that you’ve seen some examples of why it’s important to keep an eye on your credit (or your child’s credit) from a young age, how are you supposed to establish that credit without any credit history to fall back on?
Tips to establishing a good credit history when you’re young.
Before anything else, the first thing young people need to do when establishing credit is to understand what credit is and how it should be used. That can come from parents, financial advisor friends or even searching online for topics such as: “how to maintain a good credit history.” By learning the basic “do’s and don’ts” of borrowing money and maintaining good credit, a person building a credit history can help lower his or her risk of falling into the abyss of bad credit.
Once the basics of this “credit education” are complete, steps can be taken to establish credit. Some of those steps include:
With proof of income, a young person just starting out should be able to apply and be approved for a credit card. The maximum credit amount will be dependent on income so it’s important to remember that just a small amount of debt on that card could increase one’s debt-to-income ratio – so always watch how much you spend on that card, and only use credit as needed.
Build a credit history: Use the card for small, consistent purchases.
Along with being careful about the debt-to-income ratio, it’s important to show card activity and on-time payments. What better way than to use it to pay small bills that occur each month, like a movie streaming service or your cell phone bill. Paying off your balance on time each month and keeping your credit active will become an important part of your credit history and credit score.
Maintain a good payment history: Be timely with other bills.
Do you rent an apartment? Pay for Internet services? Pay taxes? Owe money on a student loan? Make certain every payment for every bill is paid on time to ensure you build a credit history of which you can be proud.
By taking the time to learn how to establish good credit as early as possible, you’ll have the foundation to help carry that positive credit behavior throughout your life. This should help you get the type of credit or loan you’re looking for at the interest rate you deserve.
To see how other myFICO visitors established their credit at a young age (or for their children) check out the myFICO Forum. And if you have some of your own sage advice, please feel free to add it to the forum!
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