Credit for 20 Somethings - A Simple Guide on Building Credit
Let’s be honest, figuring out how to be an adult can be confusing at best and a total nightmare at worst. Countless new responsibilities fall into your lap as you begin your journey to self-sufficiency. One incredibly important aspect of our society that will impact you all throughout your adulthood is credit. The term can send a shiver down anyone’s spine, but your credit score is an inescapable fact of life. It is a number that can make or break you, so it is paramount to build the best score you can. Starting this task can be daunting, but that’s why we are here to break down some easy ways to start with a solid base.
Personally, I am someone that has thought of building credit as daunting. As a recent college graduate officially establishing myself as a working professional, I know a decent credit score is necessary to get an apartment, apply for loans, and generally prove my reliability. On the other hand, I have personally seen how devastating bad credit can be, heard the horror stories of naive college kids getting locked into a credit card they cannot pay, and thus have been hesitant to broach the topic myself. Plus financial jargon can often go a bit over my head. All of this is to say - I am here with you, and am writing from a similar position of needing advice for beginners. I am simply acting as your friend that will do the research for you, and lay this out as simply as possible, like I am explaining it to a kindergartener. After scouring articles from professionals and speaking to an accountant directly, building credit does not have to be as terrifying of a venture as it seems. So take my hand, and let’s go through this together.
First, I want to start off with some basics - what even is credit? According to Experian, credit is “the ability to borrow money or access goods or services with the understanding that you'll pay later.” Your credit report basically states how reliable you are to make a payment that you have promised to make. This is important to landlords, banks, and sometimes even employers to have a concrete indicator of how much they can trust you to be responsible. The higher your credit score, the better your report looks, and the more reliable you appear.
One of the most popular ways to begin building credit is to get a credit card, but make sure you choose wisely. This can become a pitfall fast, so research different cards before you make your decision. Speaking with my dear friend and professional accountant Jenna Lucas, she says this is her best advice to start building your credit. First, she suggested getting familiar with credit card terms before doing your research. This glossary here can be a huge help if you don’t know what a word means. Then, decide what kinds of benefits you are looking for in a credit card. Did you know that opening a credit card not only builds your credit but can provide you awesome perks like hotels and flights once you accumulate enough points with them? You could potentially boost your credit score and earn a cheap vacation! Jenna says that in her opinion, any card worth opening provides some sort of points or mileage to grant you extra goodies. When opening her first credit card, she found one that had a rate she was comfortable with, and racked up points fast - and she didn’t even have to leave her bank to find it!
Opening a first card through your bank can be a fantastic avenue. Sometimes, frustratingly, the college-aged struggle of needing a job to get experience but needing experience to get a job, transfers over to credit cards. Some cards want you to have credit to apply for the card, but you need the card to garner credit in the first place. That is where secured credit cards with your bank can be a great option. This will be easier because, if you are in good standing with your bank, they already know and trust you, so they will be more willing to provide you with a card. Secured cards are backed by a deposit you give up front, typically equal to what the spending limit will be. From there they work the same as any other credit card - make your purchases and then pay off the bill on time. They are not meant to be open forever though, more of a baby step to build some solid credit in order to apply for an official credit card.
Another early way to build enough credit to get that coveted credit card, is to become an authorized user on someone else’s credit card. Do you have a trusted friend or family member that already owns a credit card and has built a good credit score? Mooch off of that success and ask if you can become an authorized user. Their awesome credit history will then be linked to you, and you will have a card issued in your name, but will not be liable if the primary account holder can not pay. However, make sure that this person’s card issuer automatically reports authorized user activity to credit bureaus, otherwise this effort will be wasted. Also, establish with this person whether you will be allowed to make purchases with your card and be responsible for those payments, or simply have your name attached. And, you know, make sure you completely trust this person to have a good standing credit report and maintain it.
One more cool early credit building tool I discovered is called Experian Boost. This basically lets your credit score thrive for just living your life and binge watching your favorite shows. Experian Boost is a free service that turns your bill paying into credit. You can link whatever bills you would like such as rent, and even streaming subscriptions like Netflix, HBO, and Hulu. Then, as long as you continue to make your monthly payments on time, those bills will start generating credit. This only comes in the form of a few points to your credit score, but when you are starting from zero, that can make all the difference, and be a simple way to improve your score without any extra effort than you already put in on the daily. It may not be beneficial once you have established credit history, but it can be a super quick and easy way to increase your score when you are just starting off.
Once you have enough starter credit to be approved for an official credit card, shop around online for the one that fits your budget and has the most appealing rewards. CNBC has a nice list of some recommended cards to get you started if you want a curated list to begin looking through. I personally thought the Blue Cash Preferred® Card from American Express looked appealing. With no annual fee for the first year and 6% cash back on both streaming service expenses and groceries, that provides a benefit to my major expenditures. Plus, online account management is crucial for my lifestyle, and their exclusive access to Broadway and concert tickets appeals to my love of theatre (outside of a pandemic anyway). Jenna did not have any specific card recommendations to give me since she really sees this as a personalized tool that everyone can benefit from, and so everyone is going to have different preferences and budgets. She did warn to be wary of store cards such as Ulta or Kohl’s because oftentimes they don’t provide a lot of incentive to be competitive and have awful rates. Some are better than others, and if it is a store you frequent it could be beneficial, but do not accept an offer they spring on you at check out and make sure to look into it before actually signing up. Ultimately she says, “do your research before getting [a credit card] instead of listening to a sales pitch.”
The most important thing is to keep up those good habits you establish at the start. Don’t begin by being diligent and then start slacking, always make your payments and maintain the standard you set to continue building a good credit history. Good habits include a handful of things, but most importantly making your payments on time. Other healthy habits are keeping your spending limited on your credit cards, hardly going above spending 30% of your spending limit. Do not open more accounts than you can handle, and definitely do not open multiple in a row. Lastly, unless an account is actively tanking your credit score or draining your funds, keep your accounts open. The longer they are active and building your credit, the better they are for you.
There will never come a time where my brain fully grasps the scope of finances or is even close to an expert on credit, it is simply not my forte. But even if the entire credit glossary has not been absorbed into my memory, I feel that grasping these simple facts makes building credit a much less terrifying task to me. Hopefully you feel the same and have found at least one bit of advice you can implement in the start of your adult life. Here at JET NOIRE we wish you the best of luck on your financial journey. If you have any other credit building tips and tricks, let us know in the comments! We would love to hear your advice, or any success stories if you took ours! Cheers to your financially savvy futures.
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Special thanks to my friend Jenna Lucas for generously sending me paragraphs of advice to help with this blog and graciously proofreading my thoughts for any egregiously terrible advice before posting this to the public.