At 20, most of us are forging our own paths into the world, whether that be undergoing a college education, backpacking through Europe on a gap-year adventure, or simply taking the big leap to move out on our own. Building credit just isn’t a priority for most 20-year-olds!
Our priorities shift and change over time, but building credit sooner rather than later can open doors of opportunity down whatever path your life may lead you down. It’s not just about financial security, but about the potential to access better housing, secure lower interest rates, and even start your own business one day.
Keep reading as we explain how to start building credit* in your 20s, from credit cards to those pesky student loans. We’ll even cover some common mistakes that can impact your credit over time!
What is Credit?
Before we dive into the exciting world of financial responsibility, credit cards, and loans, it’s essential to have a firm understanding of credit.
So, what is credit? In the world of finance, “credit” commonly refers to a contractual agreement between a borrower and a lender in which the borrower receives a sum of money with the promise of repaying the lender at a later date.
Credit can also be used to describe the risk presented by an individual or business, classified by a number rating called a “credit score.” Your credit score can range from 300 to 850 and can be considered a good, bad, or downright incredible credit score, depending on the rating. The following is a breakdown of the scores and how they are categorized:
- 579 or less: Poor credit
- 580 to 669: Fair credit
- 670 to 739: Good credit
- 740 to 799: Very good credit
- 800 or higher: Exceptional credit
Think of your credit score like a grade–the better the grade, the better your chance of passing the class. Or in this case, the better loan rates you’ll be able to secure in the future.
Why Should You Start Building Credit Early?
The last thing you want to worry about is your financial future, and when you’re so focused on enjoying that first year of college or reveling in your gap year abroad, it’s easy for your credit to take a backseat.
However, establishing credit at an early age can make certain areas of your life easier and more affordable. Here are a few ways that establishing credit now can set you up for success later.
Renting an apartment
Even if you’re not ready to fly the coop just yet, there will come a day when you want a place to call your own. Your new landlord or apartment complex will likely run a credit report to see if there’s a history of late payments or high debt. Good credit is a green light to landlords and property managers.
Landing your dream job
When you start the job hunt, your employer may run a credit check to get a sense of your financial responsibility. Despite a strong resume, a poor credit score could be the deciding factor between your dream job or ongoing applications.
Insurance rates
While it’s not always known what goes on behind the scenes when it comes to your insurance rates, it’s likely your credit score and history could play a vital role. Better credit could mean a lower premium, putting more money in your pocket over the long run.
Refinancing loans
Oh, the joys of debt. If you decided to take out a private student loan, you could have been the victim of steep interest rates. Refinancing your loans for a lower interest rate could be possible if you establish good credit beforehand.
Top Five Ways to Build Your Credit in Your 20s
1.How to Get a Credit Card for the First Time? Just Apply!
Applying for and getting approved for your first credit card can be difficult–especially if you have a thin credit file for your lender to go off of. However, some credit cards are specifically designed for those just starting to build their credit. Here are some general starter credit cards to help you begin the journey to building credit:
- Student credit cards: these are credit cards designed specifically for college students or recent graduates. Many cards offer rewards and other perks, so do your research before finding the perfect one for you!
- Secured credit cards: This type of credit card is very similar to a regular credit card except for one major difference–secured credit cards require a deposit to open the account. The deposit becomes your credit limit and as long as you make payments on time, you may have the chance to upgrade to an unsecured credit card and get your deposit back.
2. Become an Authorized User on Your Parent’s Credit Card
Becoming an authorized user on a credit card means you have access to an existing account and may even get your own card. If your parents have good credit, adding you as an authorized user could have a positive impact on your credit, essentially allowing you to piggyback off of their established credit.
3. Pay Student Loans (and Other Debt) on Time
Your loan accounts and payments are often your first line to establishing credit. Consistent monthly payments can have a big impact on your credit score and as one of your longest-term loans, can leave a positive impact on your credit history over time.
4. Apply for a Credit-Builder Loan
Credit-builder loans, or CBLs, are a type of loan with an underlying goal of helping you build credit and savings all in one. The loan starts with the lender depositing a small amount– anywhere from $300 to $1,000–into a savings account. Borrowers then make payments over the term of the loan, lasting anywhere between six months to two years. When all the payments are made, you receive the money in a savings account.
Whether you are searching for a $500 credit builder loan or more, do your research and see what works best for you and your current budget.
5. Add Monthly Utility Bills to Your Credit Report
Not every bill or payment is reported to credit bureaus, such as your cell phone, utilities, and rent. Even if you pay them off in a timely manner, they may not have any impact on your credit or helping to build credit over time.
There may be ways to add your utility bills to your credit report, though. For example, Experian offers a service that allows certain bills in your name to be added to your Experian credit report. Once listed on your report, when you pay your bill on time, your score and credit history will get a boost.
Stay Ahead of the Credit Curve
Starting the journey toward financial independence and responsibility does not have to be a long-haul battle. By starting to build credit at a young age, you’ll save money and gain access to more opportunities along the way.
At Auto Money Title Loans, our main focus is to help provide the tools for a more financially stable future and help those on the path toward financial responsibility.
Published June 2024
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Reviewed by Executive Team Member at Auto Money
Auto Money offers over 80 locations across the Southeast for individuals seeking extra cash for last-minute expenses like auto repairs, wedding costs, medical bills, and more. As title loan lenders, we practice transparency and compliance with codes and regulatory statutes presented by the SC Department of Consumer Affairs & SC Board of Financial Institutions, Consumer Finance Division.
*For Educational Purposes Only: The information provided by Auto Money is for educational purposes only and is not intended as legal advice. For legal issues, you should consult your own attorney or seek advice from a legal professional. All financial advice should be consulted with a certified tax expert or fiduciary.
The information posted was accurate at the time of posting, but archived posts may not reflect current policies. However, this information may differ from what you find on the website of a financial institution, service provider, or specific product. When considering offers, please review the financial institution’s Terms and Conditions and contact them directly for any updates and detailed information about their financial products and services.
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