Building Your Credit Score in Your 20s: Do’s and Don’ts

Building Your Credit Score in Your 20s: Do’s and Don’ts

If you’re taking your first steps toward financial independence, you may have questions about your credit and credit score. What is credit? Why is it important? How does your credit score affect your finances? How do you build strong credit?

Here are the basics:

Credit is essentially your financial reputation. It shows how well you manage borrowed money and how reliably you repay what you owe.

Your credit score (sometimes called your FICO® Score) is a number between 300 and 850 that helps banks, credit card companies, landlords and other businesses understand how likely you are to repay money or meet financial commitments. The stronger your score, the more financial options you may have. Because your score can change over time, the choices you make every day matter.

Not sure where to start? Here are some do’s and don’ts to help you establish and maintain good credit.

To build strong credit, DO:

... become an authorized user on a reliable parent/guardian’s card. Some people find they’re more comfortable starting their credit-building journey with a little help from their family. By becoming an authorized user on someone else’s credit card, you will be able to make purchases, pay bills and begin growing your credit as if the card were in your name. Importantly, though, before adding your name to anyone’s credit card, be sure they have a good credit score and are responsible for making on-time monthly payments. You want to be associated with good credit, not bad!

... open a student credit card, secured credit card or store credit card. If you’d like to have a credit card of your own, here are some options for people just starting out:

• Student credit card. Student credit cards are often designed for individuals with limited credit history. Getting approved for one may require you to provide proof of your monthly income and in some cases, a parent or guardian may need to cosign.
• Secured credit card. A secured credit card requires you to put down a security deposit that will act as your credit line. You will be allowed to charge only as much as you have deposited. By using the card responsibly and making payments on time, you may be able to build credit and eventually qualify for a standard, unsecured credit card.
• Store credit card. Many retailers offer credit cards specific to their stores. Though it may be easier to be approved for these cards than others, they sometimes charge higher interest rates on outstanding balances than other types of credit cards. If you open one, try to pay the balance in full each month so interest charges do not add up.

... make payments on time. Making on-time payments is a great way to get your credit moving in the right direction. Whether it’s credit card bills, student loan payments, rent payments or utility bills, be sure to always make at least the minimum payment on time. Late payments can hurt your credit score, and may result in late fees.

... monitor changes to your credit report. The three major credit bureaus — Equifax, Experian and TransUnion — offer free credit score monitoring with no fees. When you sign up, you can see where your credit score stands at any time and what’s affecting your credit for better or worse. Regular check-ins can help you keep track of your progress and flag any errors or fraudulent transactions that may be hurting your score so you can have them wiped from your record.

... add bills to your credit report. If you notice that certain payments — rent, phone or utility payments, for example — are not being factored into your credit score, you can ask Equifax, Experian and/or TransUnion if those payments may be added. When you work so hard to make all your payments on time, you want to get credit for that responsible money management!

To maintain or boost your credit score, DON’T:

... rack up credit card debt. Outstanding debt can have a negative impact on your credit score. Consider using your credit card like you use your debit card: Only charge purchases that you know you already have the funds to cover. This will help ensure that you’re able to make those critical on-time monthly payments, and that you’ll be able to pay your balance in full, so you don’t incur interest charges.

... miss payments. Missed and late payments account for 35% of your FICO Score; a single payment that’s more than 30 days late can decrease your credit score by up to 100 points and show up on your credit report for seven years. Consider setting up auto-pay on your recurring bills (credit cards, rent, phone, etc.) to avoid missing these payment dates. Check into online bill pay with your bank to have these payments transferred directly from your checking account.

... apply for multiple types of credit at once. When you apply for a credit card, car loan, student loan, personal loan or mortgage, the financial institution you’re working with will typically do a hard inquiry, an official look into your credit report. That hard inquiry can ding your credit score, typically by five points or less, for about a year (hard inquiries are noted on your credit report for two years). That’s not much of a hit if you’ve got just one inquiry, but they can add up fast if you don’t limit your applications.

A final DO:

DO reach out for help if you need it! Remember, you’re not in this alone. Government resources such as the Consumer Financial Protection Bureau and the National Foundation for Credit Counseling can help. You can also ask us here at Dollar Bank for personalized advice to keep you on the right path toward great credit. If you have questions about building and maintaining good credit, reach out to us anytime.