As a 20-something-year-old, building and maintaining a good credit score is one of the most important things you can do while you are young.
Although that three digit credit score (ranging between 350 – 800) seems cryptic, a good score is essential when you are ready to buy a home or car and can even become a factor when you apply for an apartment, sign up for a new cell phone provider and even when you apply for a new job. And unlike some things in life, there are no second chances when it comes to building your credit history.
But before you panic, you should know that if you pay your bills on time and have responsible spending habits, you probably have nothing to worry about. However, to be sure, here are some steps you can take to build and maintain good credit:
There are three major credit bureaus that gather information about your credit: Equifax, Experian and TransUnion. Through AnnualCreditReport.com, you can receive a free credit report every year, so take advantage of this opportunity to make sure your credit score is where it needs to be. Generally, credit scores above 700 are a sign of good financial health and scores below 600 indicate high risk to lenders.
Because your credit score can be extraordinarily sensitive to late payments, you should consider arranging automatic payments for bills. This way, even if you get busy with work or other obligations, you won’t be faced with a hefty late fee and a drop in your credit score.
30 percent of your credit score is based on your total outstanding debts such as home mortgages, credit cards, loans, etc. compared to your credit limit. As the amount you owe increases, you credit score will likely be lowered. So before you make any big purchases or take on more loans, try paying off your outstanding loans first. A good rule of thumb is that you shouldn’t owe more than 30% of your total credit limit.
Ironically enough, while your credit score can help you obtain a good credit card with a low interest rate, the process of obtaining each credit card can actually reduce your credit score. This is because when you apply for a credit card, a “hard inquiry” occurs on your credit report and multiple hard inquiries in a short period of time can seem suspicious. Also, each credit inquiry can deduct as much as five points from your credit score.
The fastest way to establish good credit history is to piggyback on someone else’s good credit by being added to a card as a joint account holder or by getting someone to co-sign a loan for you. Both of these are tricky however because your actions will also impact you co-signer’s so make sure to work out these details before contracts are signed.
If you are still in college or just about to graduate, now is the best time to sign up for a credit card, as long as you know you have a source of income to pay off any bills. According to MSN, lenders are more willing to take risks with you when you are in college because they know your parents will be able to bail you out if you can’t handle your bills.
Because of the economic downturn, an increasing number of credit card companies are actually reducing credit limits on their cards. If this happens to you, take some time to call your card company and try to get your limit reversed to its original amount because your credit score can also be affected by the credit limit on your cards.
Using 100% of your credit limit can increase your risk for over-limit fees and also decrease your credit score. The higher your score, the more points you tend to lose from “irresponsible” spending habits. So even if that big-screen TV that you’ve been eyeing is on sale, it’s not worth maxing out your card to purchase it.