Building Your Credit Score

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Having a good credit score is essential in today’s economy, but establishing good credit can seem challenging, especially for young adults. Even without delinquencies or missed payments on your credit report, a high credit score can be difficult to attain.

Typically, you can’t begin to build credit until age 18. The few exceptions to this are dependent on a parent or guardian. A parent can add a minor as an authorized user on a credit card account, or a guardian can co-sign a lease for housing or a car loan. For this to positively affect one’s credit, though, you must ensure that the creditor reports the positive payments to the credit bureaus. If you are able to secure credit this way, it becomes possible to have established credit before you turn 18.

Without the assistance of a parent or guardian, you can start establishing good credit once you turn 18. Usually, the first credit card issued in the absence of a positive credit score is a secured credit card. This type of card requires you to place a deposit, and in turn your credit limit matches that amount. For example, you give the credit card company $500, which they hold in a secured account. Then they issue you a card with a $500 limit. As you make on-time payments, your credit score grows, but if you fail to pay on time, the credit card company can use your deposited money to cover the outstanding balance. This secured card offers a low-risk option for creditors and a way to establish and build credit for those without good credit yet.

A secured credit card does require a deposit, so saving for that is a great way to work toward good credit even before your 18th birthday. Another option to increase your credit is to take advantage of programs such as Experian Boost™, which allows your payments for rent, utilities, cell phones and online streaming services to be reported to the credit bureaus. This program is free and can be used to establish and repair credit.

While having a credit card to establish and grow credit is important, fees and interest charges can add up quickly. Each month’s bill has a minimum amount due, or the smallest payment you can make without incurring any late fees or negative reports to the credit bureaus. However, if you don’t pay off the full monthly balance, you’re charged interest on the entire balance of the credit card for the month. That interest then becomes part of your total balance due the following month. If you don’t pay the entire balance off for another month, you pay the interest charges on the items you purchased plus on the interest accrued.

If you pay the minimum amount due every month, your credit card company will report positive, on-time payments to the credit bureaus. Despite this, you can still rack up credit card debt in excess of your current limit when interest fees are assessed every month. The sensible course is to never use credit cards to make payments on loans or for living expenses.

If you’re a student, a better option for educational and living expenses may be student loans. Generally speaking, there are two options for student loans: federal student loans and private student loans. Federal student loans require the borrower to complete the Free Application for Federal Student Aid, or FAFSA. Based on your FAFSA, the government sets a limit on the amount you can borrow. When possible, it’s always best to take the maximum in federal loans before turning to private lenders; in a federal student loan, the government subsidizes the interest while you’re in school. While you remain a student in good standing, the amount you will owe will not increase.

However, if the amount you qualify for in federal student loans does not cover all expenses, the next option is private student loans. These are not subsidized, and they begin to accrue interest immediately. Depending on loan amounts and interest rates, the amount owed by the time you graduate can be thousands of dollars more than you borrowed initially. The allure of borrowed money that does not have to be paid back immediately can be enticing, but the long-term costs add up. While you may be allowed to use student loan funds for dining out, travel or other lifestyle expenses, the actual cost to you in the long run is much higher than the price tag.

Regardless of the type of loan or credit card, making at least the minimum payment on time every month is essential to increase your credit score. Establishing good credit takes time, and the surest way to build it is to consistently pay on time and borrow only what you truly need.

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