Credit & Debt
Building Credit When You're Just Getting Started
Now That You're an Adult, Take Credit Seriously
When you're just starting out, you probably have several essentials on your to-do list. Find a job, rent an apartment, maybe buy a car. But one often overlooked item can be a prerequisite to all of the others: Establish good credit. Landlords and potential employers are likely to review your credit report, and lenders will check your credit score.
Kevin Laskey, a graduate student in Philadelphia, was pleasantly surprised when the subject came up during his search for an apartment. "I had to do a credit application," says Laskey, who discovered he'd built a strong credit score by always paying his bills on time during the three years since he graduated from college.
But that's the point: If you want a good credit score, you have to earn it, says Josh Palmer, CFP®, head of the wealth advisory team for Chase Wealth Management.
Here are some steps that can help you get there.
Know your financial terms
Three major credit bureaus (Experian, Equifax and TransUnion) track your credit history, which is used to calculate your credit score. The formula used most often, the FICO Score®–is based on five components.
- Payment history (35 percent of the score).
- Amount you owe (30 percent). Your debt is expressed as a percentage of the credit available to you. Your total may include student loans, credit card debt, and other obligations.
- Length of credit history (15 percent).
- Types of credit (10 percent). You'll often benefit from having a variety of credit, such as student loans and car loans along with credit cards.
- New credit (10 percent). Opening lots of credit card accounts is more likely to hurt your credit score than to help it.
Most credit scores run from 300 to 850, and a score of 670 or higher is often considered good.
Take steps to establish good credit
You may hope to have a perfect score right off the bat, but that seldom happens, says Todd Friedhaber, a certified financial counselor for Cambridge Credit Counseling Corporation, based in Agawam, Massachusetts. “Most young adults start with no credit at all," he says.
Begin establishing your financial must-haves by opening basic checking and savings accounts at a solid institution, advises Palmer, who suggests you use that banking relationship as a springboard to the institution's credit offerings.
Paying utility bills on time can be a great way of building your credit history, says Friedhaber, because some utility companies report customer behavior to credit bureaus. Keep a record, especially if you lack other evidence of your creditworthiness. Or you could buy on layaway, as making timely payments will testify to your reliability.
You might also consider asking your parents to add you as an authorized user on one of their cards, suggests Palmer. You'll be able to use the card, and in some cases the credit history of the account will appear on your credit report.
Improve a lackluster score
Missing a payment for any reason can drop your score by as much as 100 points. So if you find you have overextended yourself and have trouble keeping up with payments, try to limit the damage by contacting your creditor directly, Friedhaber suggests. Your credit card company or other lenders will have much more leeway to work with you than a collection agency does. And don't be discouraged if your credit score isn't where you want it to be. Most credit histories go back only seven years, and even within that time frame, Friedhaber says, “what you do today has greater weight than older events." (For other ideas about managing your credit and jump-starting your financial fitness, visit Chase Slate.)
Avoid credit surprises
Many online tools let you keep tabs on your credit score. Contrary to what you may have heard, there's no harm in looking it up regularly. “Checking your credit score yourself does not negatively impact the score," says Pam Codispoti, president of Chase Consumer Branded Cards. “So check it regularly to stay on top of your credit health."
Laskey has followed that advice, signing up with his credit card company to monitor his score. “I don't check it religiously but I take a peek if I'm online," he says. “It's something I'm careful about."
Keeping your credit score up is just one part of defining who you are financially during your first years on your own. But good credit can have a snowball effect, helping you move toward long-term financial goals — starting your own business, perhaps, or owning a home. Whatever your objective, says Palmer, having a positive credit history can help you get the best interest rates and cement your reputation as a reliable, creditworthy adult.
FICO is a registered trademark of the Fair Isaac Corporation in the United States and other countries.
Photo: Cavan Images/Offset | Marcia Lerner lives in Brooklyn and writes frequently about personal finance.