Financial Planning for Young Adults: Building & Maintaining Your Credit Score

Your credit score can affect your ability to do everything from buying a car to finding the right life partner. With so much at stake, having a good credit score is essential.

But how do you build and maintain a covet-worthy score? Is it even possible when you're young and just starting out with meager assets?

The short answer is yes! Personal finance can feel complex but with the right tools, building a strong credit score doesn't have to be scary or overwhelming. Here are our top tips for crafting a great credit score. 
 

1: Understand Why a Good Credit Score Matters

Caring about your credit score is easier to do when you have a clear understanding of how much it matters and why. The effort you put into building a score will feel far more worthwhile when you can directly link it to the payoff.

Fortunately, you don't need to invest a lot of time studying the subject to get there. All you need to know is that your credit score:

• Impacts your ability to make purchases and secure credit of all kinds (including mortgages)
• Determines how favorable the terms will be when you do secure credit
• Can impact your ability to get good jobs
• Can save or cost you hundreds of thousands of dollars
• Influences if and when you can achieve major life goals

 
As you can see, your credit score is incredibly important. While personal finance may not be your favorite topic, getting smart about your credit can't wait. 
 

2: Know What Factors Influence Your Credit Score

Once you know why your score matters, the next step is to understand where the score comes from. This is important for two reasons.

First, it lets you know where to focus your energy when you want to improve your score. Second, it helps you avoid wasting energy on things that don't impact your score at all.

For example, many people think that getting married affects their credit score. It doesn't. Let's take a look at what does. 

Factors That Matter 

Credit scores and credit histories are based on five main factors.  

• Your payment history
• The length of your credit history
• How much money you owe
• What types of credit you are using
• How much credit you have applied for recently

Not all of these factors are equally weighted.

Payment history, for example, accounts for about 35 percent of your score. The total amount that you owe counts for another 30 percent. The rest count for between 10 and 15 percent each.

The exact weight given to each item can vary depending on who is calculating your score, when, and why. 

Time

On average, transactions are reflected on your credit history for between seven and ten years. This means that your credit report can reflect mistakes both large and small for a long time.

Your credit score is a different story. The score itself can fluctuate rapidly. It can drop quickly but it can also rebound quickly, even with old mistakes still on your credit report.

So while time matters, it is not something to despair about if you are seeking to improve your credit. 
 

3: Start Now 

No matter how old you are or what your financial situation is, there is no better time to start building or improving your credit rating than right now. The very simple reason for that is that the length of your credit history matters.

The sooner you start building a good credit history, the sooner you can start reaping the benefits. When it comes to racking up points for the length of your positive history, there are no shortcuts.

Along the same lines, it is important to be aware that you must have some form of credit account open for a minimum of six months before credit agencies will begin tracking your credit history at all.

If you are under 21 years of age and have no credit, you may have difficulty securing some kind of credit in order to start building a history. If that is the case, consider applying for a joint account, a secured credit card, or a credit-builder loan. 

Joint Accounts

Joint accounts are where you share a bank account or credit card with another person. Often this person is a parent, guardian, or spouse. You can usually secure the account using the other person's credit rating.

This enables you to access accounts you would otherwise not be able to get. As you make regular payments and use the account responsibly, lenders take note and reflect that behavior on your credit score. This opens up new doors as other lenders see your positive history and become willing to extend other credit to you. 

Secured Cards 

Secured credit cards work much the same way as debit cards. You pre-pay the issuer (e.g. your bank or credit union) a certain amount of money. You can then use the credit card up to that amount as if it were a regular credit card.

So, for example, if you wanted a credit limit of $500, you would pay the bank that much. You could then use your card for purchases up to $500. Then you would need to deposit more money to continue using the card.

These cards allow you to build a solid credit history. In many cases, they can also be transitioned into standard credit card accounts after a year or two. 

Credit-Builder Loans

Credit-builder loans are special loans usually offered by credit unions. When you take out a credit-builder loan:

• The credit union deposits the money you are being "loaned" into a special account
• Each month, you submit your payment on time
• The credit union reports your payments to credit bureaus, creating a solid credit history for you
• When the loan is fully repaid the full amount of the loan is given back to you, often with interest

While they do require a small investment on your part, these loans can be an excellent way to create or improve your credit score.
 

4: Once You Have a Score, Keep an Eye on It

Creating a strong credit history and credit score is not enough. Once you have them, you need to keep an eye on them. 

Errors happen. Credit bureaus can make mistakes when calculating your score. They may accidentally leave an open account off of your report or fail to remove a closed account. 

If you have a common name, you may even find accounts that belong to someone else of the same name erroneously reflected on your report. These mistakes may be small, but they matter. Most are relatively easy to clean up, but you can only have them corrected if you know that they're there.

You are entitled to free copies of your credit report from each of the major credit bureaus each year. Get in the habit of requesting your report from one bureau each quarter. Dedicate some time to checking your credit report and promptly call and correct any errors you find.

This will protect all the hard work you've done to build a good score! 
 

5: Always Pay on Time

This tip sounds painfully simple but it is incredibly powerful. Paying your bills on time accounts for more than one-third of your total credit score.

With that being the case, late or missed payments seriously hurt you. Even small bills left unpaid or paid late can have an outsized effect on your score. To combat this: 

• Use automatic payment systems where available
• Set up a reminder or accountability system to ensure you're making payments on time if you must pay manually
• Use bill-tracking apps or programs to provide you with reminders when bills are coming due

If a recurring payment date is problematic, call your lender and ask if they will reschedule it. For example, if your mortgage routinely comes due two days before you get paid, ask to have it moved until after you get paid so that it is easier to make.

Also, don't discount or ignore small, one-off bills. Parking tickets, utility bills, and library fines may not have high dollar values but missing those payments will ding your credit score just as badly as missing something like your mortgage or car payment.  
 

6: Don't Use All the Credit You Have Access To

You can't get a credit score if you don't use any credit at all. But accessing your credit too much is a problem, as well. When you max out your credit lines, lenders assume you have poor self-control and worry that you may get in over your head and be unable to pay back your debts.

Ideally, you should try to use no more than 30 percent of the credit available to you at any time. If you aren't able to keep your usage at that rate, you can try requesting a credit limit increase. If you are approved and don't use any of the new credit extended to you, you may find yourself closer to the ideal 30 percent range.

If you have a low credit limit to begin with, it is best to request an increase every six months to a year anyway. 
 

7: Hold on to Your Best Accounts

If you find an account that serves you well, hold on to it! The longer your accounts have been open and in good standing, the better they look on your credit history.

Obviously, if accounts aren't serving you well you should close them. But if you're pleased with older accounts, consider keeping them even if you only use them infrequently. Doing so is an easy way to give your score a little boost. 
 

8: Watch Your Inquiries

Every time you apply for or open a new line of credit, the credit bureaus take notice. Too many inquiries or new credit accounts in a short period of time can cause your score to drop, as creditors worry you will overextend yourself and fall behind on payments.

As much as possible, space out your applications for new credit. Whenever you can, wait at least six months between applications for things like:

• New credit cards
• Mortgages
• Car loans
• Personal loans 

Alternatively, compress your applications into a very short window of time. For example, if you want to buy a car and you're looking for the best loan terms, submit all of your inquires or applications within 14 days. This will signal to the credit bureaus that you're loan shopping rather than looking to take on a lot of new debt.

While your credit score may dip slightly, it won't take nearly the hit that it would if you spaced those inquiries out over the course of several months.  
 

9: Consider Getting Professional Help

Investing in working with a certified financial planner can feel excessive and unnecessary when you're young and don't have very many assets yet. But the exact opposite is true.

Getting your personal finances in order early is one of the best investments you can make in your financial future. Financial planners can help you understand the impact of various financial choices, which can enable you to take advantage of resources you didn't know were available and help you avoid ugly mistakes.

As with your credit score, investments benefit from time and there are no shortcuts. Setting up even a trickle fund into a Money Market Account or  an IRA when you're just starting out can pay enormous dividends when you get older.

If working with a professional isn't viable right now, take advantage of free financial education resources wherever you can find them. The more you know, the better your financial decisions and outcomes will be.
  

10. Look for a Bank That Makes Credit Easy

Choosing the right bank or credit union can make building good credit easy. Providers like iTHINK Financial offer all the tools and resources you need to easily track, access, and control your money. We understand your lifestyle and priorities and we've set up our services to fit right in. 

Start Today

If you're ready to take control of your credit score, don't wait. Start today. Implement the tips above or check out our library of educational videos for more empowering information!