It seems like the entire world of personal finances revolves around credit. If you have poor credit—or no credit at all—you’ll run into roadblock after roadblock as you build your future. Thankfully, there are ways to build credit quickly, and you can start right where you are. Here are some common questions young people have when it comes to building credit, so you can take control of your financial future:
Reasons for having insufficient credit vary. Periods of financial hardship, late or missed payments, or even just a lack of access to credit building opportunities can all take a toll on your score.
Having no credit can be just as limiting as having poor credit. In order to have credit, you first need a credit account. Credit cards, store charge cards, automobile loans and student loans are examples of accounts that affect your credit.
If you’ve never made payments on a loan or a line of credit, then you are most likely in need of building credit. If you have made payments on a loan or line of credit before, you may need to improve your credit score.
Along with loans and lines of credit, other goods and services you pay for can impact your score. For example, utility companies or property management companies may report late or missed payments to the credit bureaus. Until recently, paying bills like rent or utilities couldn’t improve your score. However, failure to pay them can reduce your score.
Young people are setting goals and making moves. For example, you may want to start a business, earn a degree, or purchase a car or home. Poor or unestablished credit can hold you back by limiting your access to loans.
Additionally, bad credit causes you to pay higher interest rates and other fees. A low credit score affects how much you pay for any lines of credit you may acquire, such as credit cards. It can even increase the deposit you’re required to make before you can set up utility services such as gas or electricity.
Paying more is hard on your budget in the short-term, and keeps you from saving money in the long-term.
There are a few options to start establishing a credit history that will help you meet your goals:
This is the deceptively simple first step of building credit as a young person. Treat every bill like a big deal, because it doesn’t take many late or missed payments to damage your credit standing.
To help you meet your financial obligations, keep track of payment schedules and make sure you’ll have enough money in your account to cover your bills when they’re due. Using a mobile app can help you get a better understanding of your budget and organize your payment dates so that nothing slips through the cracks.
A secured line of credit is backed by cash or something of value, referred to as collateral. The most common type is a secured credit card.
A secured credit card works the same as a regular credit card, except that the borrower pre-pays an amount (usually equal to the maximum credit limit) to open and use the card. The borrower then makes monthly payments which are reported to the major credit bureaus.
Because the card is backed by cash that you’ve already provided, there is little risk to the credit provider. However, there are also limits to the effectiveness of this method. As a borrower you will still pay card fees and interest. Additionally, you could potentially decrease your score if you don’t make your monthly payments on time.
If you choose to build credit using a secured card, don’t plan on using it for any major purposes. In fact, you’ll want to spend as little as possible on the card while still keeping it active month to month.
Keeping a low balance on your secured card is important because of something called a debt-to-credit ratio. Your debt-to-credit ratio, also called your credit usage, represents how much credit you’ve used up, and how much is available to you.
Having a low balance on your card reduces your debt-to-credit ratio, reflecting favorably on your credit score. A high balance on your card will have the opposite effect.
As a young person looking to build credit, you may be able to get a hand up from someone close to you that has an established credit history.
Option 1: Become an authorized user
Let’s say your mom has a credit card, and she trusts you to make wise financial decisions. If she adds you as an authorized user of the card, her timely payment history can boost your credit score.
Option 2: Get a cosigner for a loan
A cosigner can help you secure a loan with favorable terms (such as lower interest rates and lower payments) IF the cosigner has good credit. A cosigner applies for a loan with you, and is as responsible for the loan as you are. Even with a cosigner, timely payments made to your loan will boost your credit score.
Choosing this route can have consequences if you’re unable to fulfill your loan obligations. If you are late making payments—or default on the loan entirely—both your credit score and your co-signer’s score will be affected. This can put a serious strain on your relationship with your cosigner.
If you already have an open line of credit, you can raise your score in two ways.
First, pay off any existing debt as quickly as you can. Start with loans or credit card balances that have the highest interest rates. Additionally, you can request a credit limit increase. If you’ve been making payments on time, your credit card provider may raise the maximum amount you can spend using the card.
Both of these methods will decrease your credit usage and give your score a lift, but they also have caveats. It's not always advisable to start paying down debt if you don't already have a savings cushion for emergencies and unexpected costs. Additionally, a credit limit increase may lead to spending temptation.
Working with a credit counselor (free for StellarFi members) can ensure you're making the right decisions.
You pay your rent on time every month…why shouldn’t that count toward your credit score?
Stellar pays monthly expenses such as your phone bill, housing, and even streaming services and reports these payments to the major credit bureaus.
With Stellar, the things you pay for pay you back. You can even track progress toward your most important goals, such as getting a credit card or even buying a house.
Don’t settle for anything less than StellarFi. Whether you are starting with no credit history, planning for a major purchase, or simply trying to bounce back — let Stellar help you reach new heights.
Here’s how it works:
You deserve credit for the bills you pay!
The StellarFi blog is intended to serve as an informational resource. While StellarFi can help you build your credit, we do not provide financial, legal, or accounting advice. Please consult a trusted advisor for financial, legal, or accounting guidance as needed.