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The earlier you start building good credit, the better. That's because when you go to buy a car, rent an apartment or apply for a credit card, you'll have an easier time getting approved if you can show you know how to handle your finances. Having good credit is one of the most important ways to do that.
That's why it's crucial to start practicing positive credit habits early. You can build credit at a young age by limiting the amount of debt you take on, adding positive payment history to your credit file and monitoring credit regularly.
Here's how to build solid credit before heading to college—and beyond.
1. Understand How Financing Impacts Your Life
Knowing how financing and credit work will help you make good money decisions as soon as you're faced with them. Many consumers spend time bouncing back from issues like high credit card debt, bankruptcy and skipped loan payments. By starting to think about your credit at a young age, you have the opportunity to avoid these concerns in the first place. Here are the basics to know:
- Your credit history is a record of your behavior as a consumer. It shows all the loans and credit cards you've applied for, how much you've spent and whether you repaid them on time. Lenders, and even landlords, will take a look at your overall financial conduct and decide whether to lend money or rent an apartment to you. Your credit report also yields a three-digit credit score, which creditors look at closely to determine your creditworthiness.
- Lenders use your credit report and score to determine the interest rate you'll get on loans and credit cards. Lenders charge interest on top of the original loan amount in exchange for the opportunity to pay off the loan over time. A good credit report and score will lead to a lower interest rate, since it will show lenders you will most likely keep up with your payments. You may also be required to pay fewer fees or have the chance to repay the loan over a shorter period of time.
For instance, when applying for a car loan, your credit affects the interest rate and length of the loan term you're quoted. In the fourth quarter of 2018, borrowers with the highest credit scores got the shortest loan terms on new car loans—62.82 months on average. Those with the lowest credit scores received average terms of nearly 10 more months.
Plus, the average monthly new car payment was $544 for those with the lowest scores, compared with $517 for those with the highest scores. That means having a low credit score would add more than $6,500 to the cost of financing a new car.
2. Have a Plan Before Going to College
Understand credit before setting foot on campus so you can avoid taking on more debt than you need. First, use the results of your Free Application for Federal Student Aid (FAFSA) to discuss with your family how much you can afford to pay for college.
If your target college doesn't offer enough financial aid to cover the cost, consider taking out federal student loans before turning to private loans. Federal loans come with more benefits and ways to lower your payment in the future if you need to.
Most important, calculate how much your total monthly student loan bill will be after you graduate. Consider how borrowing for four or more years will affect it, and make a budget before you graduate so you can prepare to pay the bill on your new graduate's salary.
Consciously weigh the pros and cons of getting a credit card in college too. Your goal when using a card at 18 should be to build credit, not to pay for items you're unable to afford otherwise. Use the strategies below to avoid the potential pitfalls of building up debt in college.
3. Get a Starter Credit Card
You can't qualify for a credit card under the age of 21 without either a cosigner or the ability to demonstrate you have sufficient income to make payments. But there are some credit cards that are specifically worthwhile for those new to credit. They can help you build up history without the temptation to spend more than you can pay back.
A secured credit card is a strong first credit card option, since it requires a minimal cash deposit that becomes your credit limit. Opt for a credit limit of $200 to $500, and you'll be less likely to overspend on the card—yet you'll have the chance to make timely payments that can strengthen your credit score. Make sure the card issuer reports your bill payments to the three major credit bureaus (Experian, TransUnion and Equifax).
You can also ask a parent or another trusted adult to add you to their credit card account as an authorized user. You can make purchases, and payment history will show on your credit report, but you won't be legally responsible for paying the bill.
4. Build Credit With On-Time Payments
The biggest factor in your credit score is how frequently you pay your bills on time. Payment history accounts for 35% of your FICO® Score* , the one lenders most commonly check. From your very first loan or credit card payment, set due date reminders on your phone—or, even better, schedule automatic payments from your checking account each month.
Your No. 1 goal from the beginning of your credit journey should be never to miss a bill payment, since doing so has the largest impact on your score.
5. Don't Spend More Than You Can Afford
The next most important factor in your credit score is how much of the available credit you've been given you actually use. Your score will suffer if, say, you've been given a credit limit of $1,000 and you regularly carry a balance of $900 from month to month. Instead, plan to pay off your total credit card bill every single month.
That means never buying something you can't afford to cover from your checking account by the time your credit card bill comes due. Credit cards give you extra time to pay for a big purchase, but taking more than 30 days to pay it off will affect your score and cost money in interest.
6. Stay on Top of Your Credit
To build and strengthen your credit score, monitor it regularly. You can check your credit score for free with Experian and many other services, including tracking programs that your bank or credit card issuer might offer.
Watching your score's progress could motivate you to keep it moving higher. Plus, you can take notice right away if, say, it drops due to an accidental missed payment. Watching your score change over time is one of the best ways to build your understanding of credit.
The Bottom Line
Committing to building credit at 18 or younger will likely make it more possible for you to get the things you want later on, like an apartment, a car or a premium credit card. Good credit will also help you secure the best terms and interest rates on financial products, saving you money. Though it requires research and forethought now, taking action on your credit while young will almost certainly pay off.