There are a number of steps that young people must take to become independent adults. These include moving away from home, getting a good job, and finding a place to live. In many places in America independence also involves purchasing a vehicle in order to have reliable transportation to and from work. Many of these things will require good credit to accomplish. Unfortunately, no one just starts off with a great credit score. You have to build it over time. In this blog we will discuss how to build your credit score so you can create the life you dream about.
Why Do You Need a Good Credit Score?
Most people can’t afford to purchase a car or a house with cash, so they will have to apply for loans to pay for them. Banks and other lenders want to know if they are likely to get a return on any loan they make. A credit score operates as a proxy for reliability in these situations. Lenders, landlords, and insurers use it to determine creditworthiness – or risk.
A good credit score can mean the difference between getting an apartment or being turned down or between getting a credit card or loan with a low interest rate versus a much higher one. Having a good credit score can help you get a lower insurance rate too. It can also be useful in finding a job. Some businesses conduct credit checks as part of their vetting process.
In other words, having a good credit score can have a very real impact on your financial well-being. So how do you get one?
Building Your Credit Score
A solid credit score is not built overnight. It takes time and consistency to build one, so you will need to take certain steps and also be aware of your bill paying and spending habits over time.
The most widely used credit scales, FICO and VantageScore, range from 300 to 850, with 850 being the highest and best score. However, most lenders consider anything above 720 to be an excellent credit score.
Your credit score will fluctuate over time. It doesn’t remain constant. Even if you reach 850, it’s unlikely that it will stay the same from month to month. Practicing good credit habits like paying your bills in full and on time will build that score over time. Older people are more likely to have higher credit scores than younger people for this reason. This may not seem fair, but remember that a credit score is basically a financial resume. Younger people have shorter work resumes – and lower cholesterol levels – too.
Here are some practical steps to take if you want to build your credit score:
- Apply for different types of credit, such as credit cards and car loans.
- Limit the number of credit applications you make. Applying for too much credit or having too many credit cards can have a negative impact on your credit score.
- Keep your credit card balances low. High balances can indicate to a lender that you are financially overextended and may not be able to pay back the credit extended.
- Pay your bills on time every month. Missing payments or late payments can negatively impact your credit. Make sure to pay your utility bills too – on time.
- Monitor your credit report regularly and make sure that the information is accurate. Mistakes can happen, and you don’t want to find out there’s been an error when you are trying to make an important decision or purchase.
Your parents may be willing to act as a consignor for a loan or a rental payment, but it’s important to put things in your own name if you want to build a reputation for reliability. If you want to live independently, you will need to apply for your own credit and pay it off according to the terms of the lender.
At Meadows Crossing we watch the energetic and ambitious young people in our community begin their lives and careers every year. Education is important for success, but so is financial stability and independence. If you have not yet started to build a good credit score, now is the time. Handle credit responsibly and carefully, but begin your financial resume sooner rather than later.
