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You might think you don't need to need to pay attention to your credit score until you want a mortgage or car loan. But even if you're not planning on buying a home or car anytime soon, it's a good idea to establish a good credit history.
Why? Let's take a look.
Your Credit Score Can Affect You in Surprising Ways
Your credit score influences more than just your chances of qualifying (and the terms you'll be offered) for a loan. Here are some other ways it can affect your everyday life:
- Finding an apartment: Landlords can't check your credit score, but they can check your credit report (with your written permission). If you've missed a payment or had an account go to collections, it may be tough to get an apartment. A "thin" credit file also won't help you as it gives a landlord little to go on.
- Getting a job: Like landlords, employers can't see your credit score, but they can check your credit report. Not every job does it, but some employers will use your credit report to judge your responsibility and trustworthiness—especially if the job involves handling finances or sensitive data. If you have bad credit or no credit, it could ruin your chances of getting hired for certain jobs.
- Saving on car or homeowners insurance: In most states, auto and homeowners insurers can use a credit score-based insurance score to help determine your rates. If your credit is in great shape, it could save you money.
- Getting started with utilities: While your utility bill isn't typically a debt payment, utility companies often run a credit check to see how likely you are to pay on time. If your credit is less than stellar, you might be required to pay a deposit, which you may not get back until you move again.
By building a positive credit history and score, you may have a better chance of getting the job or apartment you want and saving money on insurance and utilities.
Debt Can Sneak Up on You
You should have enough savings set aside to keep your head above water in case you're hit with unexpected expenses. But if you don't have that savings yet, it pays to have good credit when life hits a snag.
For example, if you need money for car repairs, good credit could mean qualifying for a low interest personal loan instead of resorting to a loan that has unfavorable terms.
If your car unexpectedly breaks down or gets totaled, you could wind up financing a new one on short notice. Having great credit can save you thousands of dollars in interest charges on an auto loan.
In other words, you may not plan to finance anything, but life doesn't always go to plan. Having good credit puts you in a good position and give you options when something goes wrong.
How to Establish a Solid Credit History
If you haven't started building credit or you have negative items on your credit report, now is the time to start working on it—even if you're not planning a big purchase with a loan anytime soon.
Here are some ways you can do it:
- Become an authorized user on a credit card: If you have a parent or close relative with good credit, ask them to add you as an authorized user on their account (typically a credit card). The account's history will be added to your credit report.
- Use a secured card or credit-builder loan: Getting a secured credit card or credit-builder loan can help improve your credit score as long as you always pay on time. Paying off your balance every month will spare you from potentially costly interest.
- Keep credit card balances low: Your credit utilization ratio plays a major role in determining your credit scores, so you'll want to keep your credit card balance low relative to your credit limit. Experts say a credit utilization ratio above 30% will hurt your credit scores. You should aim to get your ratio as low as possible.
- Avoid unnecessary debt: Only apply for credit when you need it. To keep your payments manageable, avoid taking on debt that you don't need.
- Add your rent and utilities to your credit report. Programs like Experian Boost®ø and some rent reporting companies allow you to add your rent, utility or telecom payments to your credit report so they can count towards your credit score.
As you follow these and other credit-building tips, you'll have a much better chance of saving money and being prepared in case of an emergency or a large planned expense. Ultimately, it's important to build credit now so you have it if you need it.