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How to Get Good Credit at a Young Age
Having good credit can open the door to many financial possibilities, such as purchasing a home or car at a low interest rate or receiving a larger bank loan. These benefits are great in building personal wealth and becoming financially independent. For this reason, it would be smart to follow certain steps to get good credit at a young age. Doing so will teach you how to be financially responsible and afford you more time to establish a high credit rating.
Part One of Four:
Starting Young Edit
Understand what makes for a good credit score. A credit score is a measure of how responsible you are with credit. Do you pay your bills quickly and in full, or do you just pay the monthly minimum, and late at that? There are a lot of factors that make up your credit score, and knowing them will help you plan for good credit:
- Payment history — 35%. How often do you pay your bills on time? Late payments hurt your score.
- Debt usage — 30%. How much debt do you have in relation to your overall limit? Low debt and high limits is what you’re after.
- Credit age — 15%. How long have you been establishing your credit? The longer the better.
- Account mix — 10%. How many accounts or lines of credit do you have open? The more the better.
- Inquiries — 10%. How often do you apply for new credit? Too many inquiries can hurt your score.
If you haven’t already opened a checking or savings account, open one. Ask your parents to help you set up your own bank account if you’re younger than 18. In today’s digital world, it’s very hard to maintain good credit and pay off credit cards without the help of a bank account.
- Open both a savings account and a checking account. Put money that you want to save for a rainy day or for investment into the savings account. Put money that you’ll use to pay off your credit card or other debt into the checking account.
If you haven’t already, apply for a credit card. If you’re younger than 18, have a talk with your parents about co-signing. (You can’t apply for a credit card yourself if you’re under 18.) Understand a few things about your credit card before you use it.
- You need to have a steady source of income to qualify for a credit card. You parents will be able to apply and then add you as an authorized user, but if you’re applying on your own, a monthly allowance from your parents doesn’t count!
- If your parents act as co-signers on your account, they’ll be responsible for monthly payments. You’ll be responsible, too, but any bad decisions will affect them. Understand that before you go on a vicious spending spree and max out your credit card.
- Use your credit card for things you can afford, not for the things you can’t. If you want to establish good credit, use your credit card only when you have the cash to pay off your debt. Otherwise, your credit ship will slowly start sinking.
Apply for a loan on a car. This may require your parents becoming co-signers (and you would have to be 18), but if you have proven yourself to be responsible, your parents should be happy to oblige. Depending on where you live, you may have to hold car insurance and then provide various proofs of identification and income.
- Don’t just buy a car because you feel you need to establish good credit. If you’re going to buy a car and want to finance it with a loan, this is a decent option. Having another line of credit open will help your score if you repay the loan.
- But know, too, that paying a loan on something like a car will end up being more expensive in the long run than paying for the car with cash. You’ll be paying interest payments.
Use your parents’ good credit to give you a boost. Ask your parents to help you build good credit early. This can be done by having them transfer some household bills into your name. The more bills you pay on time and in full, the better your credit score will be in the long run.
- You don’t even need to pay for the bills yourself. Have your parents transfer the money into your account and let you pay off the bills.