Your credit score indicates your ability to manage debt in a timely manner. To others, it is also a show of responsibility and trustworthiness. The higher the number, the more responsible you are with your finances.
However, building it up can prove challenging for anyone, but more especially for young adults. An article on credit statistics by The Balance reveals that younger consumers tend to have lower credit scores. People between 20 and 29 have an average credit score of 662. To compare, a credit score of 700 or higher is considered good. So it goes without saying that it’s worth building up your credit score early on.
Why a Good Credit Score is Important
Acquiring good credit is important as it makes it easier and cheaper for you to borrow money from financial providers. And according to a guide to good credit by Petal Card, it also grants you access to larger loans and credit cards. So, while a low score doesn’t bar you from borrowing money, it does mean you’ll have to pay more for the privilege. That said, improving your credit score should be your first priority when getting a new car, purchasing a house, or pursuing graduate studies.
How to Improve Your Credit Score
1. Open a bank account
While your bank account information isn’t usually part of your credit report, your credit applications will ask about them. That said, opening a bank account and depositing money in it will establish you as a responsible, credit-worthy individual. Plus, it serves as another tool for you to better manage your finances.
2. Apply for a secured credit card
Banks usually offer credit cards to people with a good credit history, so you might have trouble applying for one when you’ve only started working on your credit score. What you can do is apply for a secured credit card. The Federal Trade Commission explains that a secured credit card works like a debit card, and you can use it to build your credit history.
3. Pay student loans on time
If you took out student loans to pay for your undergraduate education, you can raise your credit score by keeping up with its payments after you graduate. Though this is easier said than done, this should be part of your debt management plan. Avoid late payments for your student loans because that can cause your credit score to drop.
4. Avoid credit card debt
Taking on too much credit card debt than you can pay will lead to high interest charges. And the more your credit card debt swells, the more harmful it is for your credit score. Another feature on Bank & Card lists a few ways to avoid credit card debt. For one, it’s best to avoid using your credit card for things you cannot afford because it compromises your future income. While you’re still young, it’s best to develop healthy spending and budgeting habits. Stick to a strict budget as this helps you maintain your credit score and keep your expenses at a manageable level.
5. Don’t submit too many loan applications at one time
Anytime you apply for a loan, the lender requests your credit report to inform their final decisions. According to Investopedia, this is known as a hard inquiry. It provides lenders with your full credit history and current credit score. Hard inquiries cause your credit score to decrease and remain on your record for two years, so it’s best to space out your loan applications. Otherwise, you’ll see a significant drop in your score.
Your credit score is a useful tool that can lower the price of big purchases and make loan applications more convenient. That’s why it’s vital that you start working on it as early as possible. After all, it’s the first step to financial freedom.