Tips to build your credit while you're young—and a million reasons why it's important
How to build up a good credit score while young and how to not get caught up in over-the-top marketing when choosing which options are right for you
What is credit?
Credit is the ability to borrow money with the understanding and under the agreement that you will pay later. A credit score is a three-digit, numeric representation of an individual’s capacity to repay a loan.
Buying on credit became popular during 1920s consumerism to allow average Americans the ability to finance higher-priced items like cars. These days, you probably think of credit more in terms of a credit card, and less in terms of having an account with a specific store.
Why is having “good credit” such a big deal?
Having good or even decent credit can help you big time in the long-term.
You can reap the benefits from the best credit cards
The top-tier credit cards provide users with special access to private lounges and clubs. Some credit card companies even have deals with popular restaurants where they have leverage getting you into an almost impossible seating.
You can get loans with more favorable terms more easily
In the loan-approval process, those with bad credit scores are often denied, as they’re considered unstable and risky. However, a good credit score can make the loan application process seamless, as they trust that you're "good for the money." With better credit, you're more likely to secure lower interest rates and better terms on loans, cards, and insurance. Why? It's common for insurance companies to reward your responsibility with lower rates because you are deemed less of a financial risk.
The importance of starting building credit young
Your credit score will stick with you for your entire adult life. While it’s possible to improve a bad credit score, it’s much more work to fix than to just start out with a favorable one. Do yourself a favor and learn how to achieve and sustain a great credit score from the get-go.
How to start building credit early
There are many ways to go about building credit. The most obvious is to open up your first credit card. However, if you are still financially dependent on your parents, you can explore the option of becoming an authorized user on their account, which is essentially another card for them, but in your own name. This will help your credit reputation—as long as your parents maintain good credit—and is easy to do while you’re still young. It’s beneficial to discuss how your parents manage their credit as insight into how you can continue their positive credit behaviors after you get your own card.
If you are at the stage at which you are ready to open up your own credit card, find a card where the terms are fitting for you and go for it! It’s time to build up a great credit history. (Watch out for these top credit myths!)
Credit mistakes to avoid
There are many mistakes that can harm your credit! We'll coach you to prevent your score from ever dropping.
Make your payments on time
Having backed up or late payments even by a few days can initiate massive blows to your reputation. That's why it's crucial you're sure that every purchase you make is well within your means. Just because it's not immediately drawing from your checking account like a debit card, you're still on the hook to make those payments! And having a poor payment history is the easiest way to hurt your credit score.
Obviously, it’s best to pay off your credit card bills on time. If you find yourself in a tough spot, give your credit card company a call and see if they're willing to work with you.
Keep your credit utilization rate low
A credit utilization rate (ratio) is a numeric expression of the amount you currently owe in terms of your credit limit. While you always want to meet your card’s minimum charge, it’s important to pay your outstanding balance in full to keep your ratio favorable.
Track your debt
Loans and previously opened accounts also factor into your credit score, so keep up with all of your repayments to ensure the best score. Additionally mortgage foreclosures, bankruptcies, and car repossessions all pay into credit.
Lucky for you, Pocketnest has a handy-dandy debt elimination plan builder right in the app. Check out the Debt theme for more. (It's cool, we'll wait... 🙇)
Limit your credit cards
No matter how eager you are, don’t get into a credit application frenzy. When credit card companies detect that you've been applying for more credit options than a 90s one-hit-wonder, especially in a short period of time, it sends the message that you're financially unstable and not an ideal customer.
Ignore the gimmicks
No matter your age, it's incredibly easy to be swept away by advertising gimmicks or true-good-to-be-true deals. A large percentage of the credit cards you see advertised on TV or online use over-the-top marketing strategies that leave users confused as to which companies truly offer good deals and which are scamming their audience.
Beware of phrases such as “as low as” since this could give you an unrealistic example of the card rate you’ll actually be receiving. Also, think twice about introductory rates. While having a discount at the beginning of a contract can be a good thing, make sure your full-time rate is something you can manage. The first six months aren’t going to last forever.
Unnecessary points can also be a credit card scam. If your potential card helps you acquire a large quantity of points, but those points are useless to you, it’s not worth using points as a deciding factor. Some points quickly expire or have insane terms that make them practically impossible to redeem.
Remember you don’t need the physical card to act as a status symbol. Gold cards sound and look fancy, but in reality, (unless you actually qualify for the upgrade), you shouldn't waste your money on the special cards when the benefits aren’t often dramatically better.
Bottom line: if it seems too good to be true, do some more research and read 👏the 👏 fine 👏 print 👏.
Keep in mind
Don’t beat yourself up if you can’t keep your credit perfect at all times: carrying some debt and incurring interest is inevitable at points. Start young, keep it up. And remember: you can always boost your credit score; no score is too high!
Now pop into the Debt theme and take a peek at your debt elimination plan to make sure everything's squared away! You got this!