One of the most important things that young adults can do to set themselves up for financial success in the future is to build a strong and healthy credit score. Why is it important to start building credit? It determines what rates you can get on a mortgage, car loan, and any other type of loan. If you are just starting your credit journey, there are a few things to keep in mind when making monetary decisions.
What is credit?
You may be familiar with this word if you are in college trying to build up credit hours for graduation. In the financial world, however, credit can refer to an agreement between borrower and lender or an individual’s credit history. Credit scores range from 300-850 with 850 being the best. A good score is considered anything above 650, while great score is typically anything above 720. Credit score is determined by multiple factors, the main ones being payment history, length of credit, and credit usage.
- Payment history: The most important factor, paying on time can boost and paying late can damage your score. The later you pay the more it could hurt your score.
- Length of credit: The longer you have a line of credit open – revolving credit – it could potentially help your score by paying the monthly payments.
- Credit usage: The more you use your credit card and pay it off fast, the more likely it is for your score to increase. The utilization rate is one of the most important factors because it shows your usage versus the amount of credit available. The recommended utilization rate is 30% so you can show that you are responsible with your credit and do not need to rely on it heavily.
How do I build my credit?
A good way to start is with small purchases, items you know you can pay back almost immediately – ideally within the week like a meal, groceries, or gas fill up. Try to avoid having a consistent revolving credit line. Revolving credit is having a constant balance on your credit card for an extended period of time. It can show that you are unable to pay back the debt, which in turn could harm your credit score. Try to pay off as much of the balance as you can. Because of interest, paying only the monthly minimum will lead to paying more than the value for what you bought. Another reason to pay more than the monthly minimum, is it can take a significantly long time to pay off the balance, which could damage your credit score.
During your credit building journey, it’s important to take precautionary steps in order to keep your hard-earned credit safe. Do not give your personal information, such as your social security number, to an untrusted source. Avoid letting people who are not listed on your account use your credit card.
Building your credit is an exciting step in adulthood. By establishing smart habits, such as paying your balance on time, making smart purchases, and always keeping your credit limit in mind, your credit score can become a powerful tool for when it’s time to buy a home or pursue higher education. Learn more about credit building tips on arvest.com.