Start Building Your Credit While Young

Building your credit while young opens many doors and gives you access to an array of financial solutions, from affordable LOCs and specialty cards to unsecured consumer loans, mortgages, and others.

Start Building Credit in Steps

Step 1 – Learn More about Credit

It is important to understand how FICO works. There are several factors that affect your score, including length of history, payment history, and utilization. Your payment history is the most important factor for financial institutions. If you are late on your payments, this will cost you in additional interest charges and fees and your score will suffer. Another factor that loan providers look into is credit utilization or how your credit limits relate to your debt balances. It is important to keep your ratio below 30 percent to build a good score over time. The types of accounts used also determine your score, i.e. secured and unsecured cards and loans, LOCs, and other financial solutions. The age of your history also matters and is based on the average age of all accounts and the age of your oldest and newest account. Obviously, borrowers with a long payment and credit history are viewed as trustworthy and offered an array of attractive financing options. New credit also pays a role, and too many applications for card accounts may ruin your score. Learn more with these back to school financial tips.

Step 2 – Apply for a Secured or Department Store Card

If you are new to credit, there are some options available to get you started. One is to apply for a department store or secured credit card aka and make on-time payments. Make sure your payments are reported on a regular basis to Equifax and other major bureaus. If you don’t meet the requirements, you may ask your parents for help. They can add you as an authorized user on an unsecured card. Again, it is important to make timely payments because bad financial decisions will affect both of you. As an alternative, your parents may cosign for you to increase your chances of getting approved. Applications should be kept to a minimum because they show up on your file. Even if you get approved, you may be tempted to splurge and overspend.

Step 3 – Diversify

The next step to building credit is to apply for a small unsecured loan. This is a good way to diversify your payment history and prove lenders that you can handle different types of credit. If you are a union member and regular customer, you may want to check with them. Unions usually offer attractive loan terms, repayment schedules, and rates.

Step 4 – Pay all Bills on Time

Make sure you pay all bills on time, including utilities such as gas, phone, water, internet, and others. Being late on payments is not the way to build and keep a healthy score. Credit bureaus collect information from a variety of sources, not only financial institutions. Late and missed payments will affect your score eventually even if they don’t go to collection. It is important to keep up with payments and use your account regularly. If you don’t use your account, your financial institution may close it after a certain period. This means a shorter payment history and a higher utilization ratio, both of which will affect your score. Finally, you may want to check your report on an annual basis to make sure there are no omissions or errors that can bring your score down. Inform the credit bureaus promptly if you find any discrepancies.