Building a good credit score can take time, but it is the single most important investment you can make to secure your financial future. Fortunately, regardless of your age or experience with finances, it is possible to improve your credit score over time by taking practical steps that allow you to enjoy the benefits of good credit.
What Does It Mean to Build Credit?
The higher your credit score, the easier it is to buy a home, secure a loan, and take advantage of the best interest rates. However, credit scores are based on financial history, which means that you need to set up accounts and make financial transactions. This includes opening loans and credit card accounts and always paying them on time to build strong credit for the future.
Understanding Credit Scores
In simple terms, your credit score is a three-digit representation of your creditworthiness. Ranging between 300 and 850, credit scores are calculated using several formulas that are based on the information in your current credit report. When calculating credit scores, credit bureaus take factors such as your loan repayment history, outstanding debt, and current assets into consideration. An “Excellent” credit score is generally any score above 800, while a “Good” score starts at about 670. A score below 579 is considered “Poor.”
Why Building Credit Matters
Building credit is important because it affects many different aspects of your life, both practical and financial. For starters, all financial institutions use credit scores to determine whether they will approve a loan, the interest rate offered, and the terms that are appropriate. In addition, other businesses, such as insurance and utility companies, use credit to determine rates and limitations on the services and plans they offer.
How Long Does It Take to Build Credit?
Because your credit score is based on the information in your credit report, your financial history is the main factor that contributes to your score. Therefore, building great credit takes years. However, for those just starting out or trying to rebuild credit, the timeline for improving your credit may be a bit shorter.
Building Credit from Scratch
Someone with absolutely no financial history, such as a young adult of 18, will start with no credit score. However, taking simple steps to create credit activity allows them to quickly build credit. In fact, getting a secured credit card or becoming an authorized user on someone else’s credit card (such as a parent or other relative), helps them earn a score in as little as three to six months.
Tips for Building Credit Quickly and Responsibly for Teens and Young Adults
Whether you are young and just starting out or someone who has made prior mistakes and wants to put your credit score on the path to improvement, several quick and easy steps can help you build credit quickly and responsibly.
Get the Right Credit Card for Building Credit
If you have no credit history at all or poor credit, many credit card companies will not want to offer you an account. However, if you are completing a first-time credit card application, keep in mind that certain types of credit cards are designed to help people build credit, making them an ideal option, especially for teens and young adults.
The top options among these cards are secured credit cards, which require borrowers to make a cash deposit into a savings account that is equal to the credit limit. This provides the lender with collateral because you cannot spend more money than what you have already deposited into an account with that lender. This allows new credit users to practice making transactions and making payments on time each month to build a solid credit history.
Another option available for teens and young adults is becoming an authorized user on someone else’s credit card — usually a parent or other close relative. This is a great option if your parents have excellent credit and a habit of paying off their full credit card balances each month. As an authorized user on one of their accounts, you don’t even need to make any purchases to build your credit.
Don’t Open Too Many Accounts
While opening one or two strategic credit card accounts and paying them each month will help build your credit, it’s equally important to not open too many accounts, especially around the same time. First, having multiple accounts open makes keeping track of payment dates more difficult and increases the likelihood of driving up your debt as you cycle through accounts.
It’s also important to pay attention to when you open accounts and how often. Each time you apply for a credit card or a loan, the institution will look at your credit score and credit history. A large number of inquiries on your credit report has a negative effect, as it brings down your score each time and tells lenders you are actively looking for credit, which is sometimes a sign of financial stress.
Get Started with a Credit Card at Hudson River Community Credit Union
As you look to build or improve your credit score, partnering with a trusted local financial institution can really help. At Hudson River Community Credit Union (HRCCU), we offer a variety of financial products as well as personalized help and advice designed to aid you in your journey to building a good credit score. Call or visit HRCCU to get a credit card and learn more about our financial services for teens and young adults.
