Teen Vogue's Twentysomethings Guide is your go-to resource for the more confusing parts of going out on your own.
I started building my credit when I was 16. More than 20 years later, with a credit score of around 800 and thoughts of owning a home, I realize just how important that early step was. Like me, you can also start building your credit as early as high school.
“It may seem so early to be thinking about building credit, but the sooner you get educated about credit health and what it takes to have a strong credit profile, the more you can navigate your finances with confidence,” says Farnoosh Torabi, a financial expert and host of the Webby-winning podcast So Money.
You have to be 18 to open a credit card or bank account on your own. If you’re not yet 18, a parent or guardian can sign for you to open a bank account or add you as an authorized user to one of their credit cards, as my parents did. I got a card in my name, and my parents, who were ultimately responsible for the bill, were able to set a limit on my spending and help me learn not to go overboard.
In case you’re wondering, my limit was $500, and no, I didn’t always manage it responsibly. There were times when I was late to make payments and charged more than I could pay off. Still, having that first credit card — and my parents' help as I learned to use it responsibly — made it significantly easier for me to get approved for my own credit when I got older.
Read on to learn more about what you should know for building credit.
Your credit score is determined by a few things: how long you’ve been able to borrow money, how much you’ve borrowed, and how timely you are when making payments. A credit score above 680 is considered good and can make it easier to get approved for an apartment rental, credit card, or mortgage. A score above 750 will get you credit cards that offer the best perks, such as airline miles, free hotel rooms, airport lounge access, and, more important, the lowest interest rates.
Auto loans, mortgages, and monthly installment loans, like those you might take out to buy a TV, pay for a vacation, or finance the purchase of new furniture without interest, can cause your credit score to dip temporarily. Make your payments on time to see your credit score bounce back.
If you have any student loans, you'll see them represented on your credit report. Though it might be a hard figure to gauge, Torabi recommends students borrow no more than the salary they anticipate earning their first year out of college. “If you run into challenges paying off your student loans in the future," she says, "this can potentially hurt your credit score.”
There are three different companies that lenders consult for credit reports: Experian, TransUnion, and Equifax; and most rely on another company, FICO, to formulate your credit score. You can order a copy of your credit report for free and request corrections for any mistakes you find, including unpaid accounts you never opened.
The best thing you can do for your credit score? Pay all your bills on time every month. If you do miss a credit card payment, try to catch up within 30 days. By this point you’ll have been charged a late fee by the credit card company, but your account won’t yet be reported as being late.
Set up automatic payments for your credit cards to make sure your minimum balance gets paid on time each month, but only if you're certain you’ll have the money available in your account. Don’t charge so much that balances become bigger than you can pay off, but if you must carry a balance, look for lower interest rates. Keep in mind, late fees and the penalty interest rates they trigger make it exponentially harder for borrowers to pay off debt.
If you do have credit card debt, avoid missing payments, and pay off balances with the highest interest rates first. Your credit card debt likely carries a higher interest rate than your student loan or car note, so tackling credit card debt first can ultimately save you money.
According to LendingTree, the average credit card has an annual purchase rate, or APR, (interest rate and associated fees) of 24.71%, but rates on student cards can be as low as 18.94%. Borrowers with the best credit may be able to secure interest rates as low as 13.63%, according to the lending company’s data.
As with getting a job, the first credit card on your own can be the hardest to get. It’s a situation Jenelle Dito, senior director at FICO, understands: “It can seem like a catch-22 situation because, in order to get a credit score, you need a little bit of a credit history,” she points out.
If you’re already in college, you may be able to open a credit card on your own even if you don’t have established credit or a full-time job. Capital One, for example, offers a SavorOne credit card that is designed for college students who don't have established credit profiles. Discover also offers a student credit card.
Another option is to start with a secured credit card. These low-limit cards may require a payment up front and function more like a debit card, but you can use them to show lenders you’re taking a more responsible approach to managing your money.
“FICO scores evaluate secured cards the same way as any credit card,” says Dito. Just be prepared for a higher APR, an average of around 27%, according to LendingTree.
When you prove you can manage one credit card, it becomes easier to get another. Just remember, each application for new credit will bring down your credit score by a few points, more if you struggle to manage your spending across a number of credit cards.
Says Torabi, “My mistake in the early days was opening up store credit cards because I wanted to earn the discounts and perks that came with them.” Having a Bloomingdale’s credit card made her feel like a grown-up, she says, but she quickly learned that having a wallet full of store credit cards isn’t the best way to build credit. “They encourage spending and can do more to hurt your credit than help.”
