Your credit score is one of the most important financial numbers. It helps you access better loan terms, more rental units, and other perks. However, some people do not rush to build credit. Some people are afraid of credit card debt and do not want to create that risk for themselves. Others believe credit scores are only useful if you are getting a loan. Homeownership can feel far away for some 20-year-olds and make them not prioritize their credit score. We will examine the benefits of building your credit early and what a good credit score is for a 20-year-old.
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When Does Your Credit Score Start?
Your credit score starts when you get credit lines and pay creditors. Paying with cash does not build credit because it’s not trackable. The major credit bureaus receive that information when you pay with a credit card and repay the debt. They use your payment history and other details to assess your credit score. You don’t need a credit card to build your score. Taking out any loans will give you credit, and making on-time payments will improve your score. Borrowers take out credit builder loans solely to build their credit.
The Average Credit Score of 20-Year-Olds in the U.S.
Credit scores vary across age groups and locations, but the average credit score for 18-24-year-olds was 679 in 2021. A 679 credit score will help you qualify for most loans, but raising that score can also provide lower interest rates and other advantages. If you do not have the average score, don’t worry. Making consistent on-time payments will raise your FICO score over time.
What is Considered a Good Credit Score for a 20-Year-Old?
Experian defines a good credit score as anything above 700. Getting your score to this level will help you qualify for most financial products. Reaching this level takes time, but you can start building your score now. For example, waiting to prioritize credit right before qualifying for a mortgage can limit your housing options and result in a higher interest rate. Aiming for the 700 golden standard will save you thousands of dollars.
Why a Good Credit Score is Important Early On
A good credit score puts you in a better financial position. You get access to better opportunities and will have more space in your monthly budget. In addition, a great credit score can help you with the following:
Leasing Homes or Apartments
Credit scores don’t only help home buyers. Landlords will review your credit score when deciding if your tenant application will get approved. Landlords have minimum credit score requirements and review your financial outlook. They want to make sure you can cover the monthly rent payments and have a history of staying on top of debt. On the other hand, a bad credit score may force you to settle for a less attractive neighborhood or prolong the application process.
Establishing Utility Payments
Utility companies look at your credit score when deciding how much to charge. They view consumers with good credit as less risky and reward them with lower monthly bills. Utilities are an essential expense, and saving money each month via a good credit score can go a long way.
Applying for a Job
Employers will run background checks before hiring you. Some employers will check your credit score to assess how well you manage your money. Some employers view your money management skills as an indicator of how you will perform at the company. These employers may believe someone who cannot effectively manage their personal money will struggle to manage the job’s responsibilities. A good credit score indicates you can manage money well, and employers will feel more confident in your ability to perform the job well.
Buying a Car
Most people do not pay for a car with cash. Car buyers often get a loan or lease to acquire their vehicle. Both arrangements require a minimum credit score. Lenders don’t want to get stuck with the car if you can’t make payments, especially since cars are depreciating assets. A higher credit score will help you qualify for financing and obtain your vehicle. You will also get better terms on your loan or lease.
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Better Interest Rates and Terms
Interest rates are a fundamental component of any loan. For example, reducing your mortgage loan’s interest rate by 1% can save you hundreds of dollars per month. Unfortunately, poor credit limits your options, and you may have to resort to toxic loans such as payday and title loans.
Higher Credit Limits
A higher credit limit gives you more flexibility. You can spend more money on your credit card before hitting your limit and paying additional fees or facing a restriction on your card. Even if you have no plans on hitting your credit limit, a higher limit will improve your credit utilization ratio. The credit utilization ratio measures how much of your credit limit you have utilized. You can only improve credit utilization with a higher limit and by paying off debt.
Ways to Build Your Credit Score Early On
Building your credit score early will put you in a better position to qualify for loans, leases, and other resources. You can use these strategies to improve your score to prepare yourself for long-term opportunities.
Get a Credit Builder Loan
Credit builder loans let you make monthly payments for a small loan solely for building credit. Most lenders do not give you any of the principal until you fully repay the loan. This practice ensures the principal doesn’t get squandered and consumers have a chance to build credit.
Become an Authorized User
Authorized users piggyback on another person’s credit activity. You can ask a friend or family member if you can become an authorized user on their activity and gain points as they make on-time payments. You should only become an authorized user of someone who pays their bills on time. If the primary cardholder falls behind on debt and sees their credit diminish, you will also feel the consequences on your credit score. Becoming an authorized user links you to the other person’s credit activity, for better or worse.
Consider Getting a Secured Card
Most credit card companies check your credit score before giving you a card. The issue with this approach is that most people do not have credit scores when applying for cards, especially 20-year-olds without student debt. A secured card is easier to obtain since you have to fund it. Secured cards require a security deposit before you can use them. This security deposit acts as your credit limit, and you must continue funding your secured card to use it.
Secured credit cards don’t have the same rewards and flexibility as unsecured credit cards, but they are easier to obtain. You can build your credit using a secured card and use the higher score to eventually acquire an unsecured credit card.
Avoid Using All Your Credit
Credit card issuers give each person a credit limit. This limit is essentially an allowance. Spending over the limit will trigger fees and restrictions until your credit card balance is below the limit. Therefore, you should avoid hitting your credit limit and pay the debt on time. Paying on time will improve your score, and using less of your credit will strengthen your credit utilization ratio. A utilization ratio below 30% will improve your score, but it’s optimal to have a credit utilization ratio below 10%.
Ensure Your Student Loan Payments are Reported
Student loan payments can improve your score by demonstrating reliable payment history. Contact your lender to ensure they report loan payments to the major credit bureaus. If the lender does not budge, reach out to a representative at one of the credit bureaus for the next steps. You can submit details on student loans by signing a data-furnishing agreement and using the Metro 2 format. The Metro 2 format is a universally accepted method of reporting credit activity to the bureaus. You will have to use software to create this file and upload it to one of the major credit bureaus’ databases.
Regularly Check Your Credit Score
Tracking your credit score keeps it top of mind and can reveal insights. Ask yourself what you did recently to warrant any movements in your credit score. If you paid off old debts, your credit score likely increased a few points. Increasing your credit card debt may have resulted in a lower score since that activity hurts your credit utilization ratio. Monitoring your credit report will inspire you to practice prudent money habits and protect your credit.