It’s crucial for young adults to establish their credit history early so they can access better insurance rates, get easier approval for renting an apartment and ultimately, have an easier time applying for mortgages and other types of loans. Here are six ways young adults can establish good credit.
Get a secured credit card.
A secured credit card is like a regular credit card. You make purchases and make a payment when the bill comes. If you don’t pay off the balance, you’ll be charged interest.
The difference is you make a deposit when you open the card. That becomes your credit limit. This way, the bank is covered if you don’t pay your bill.
Become an authorized user.
If you have good credit and are willing to add your young adult child to an existing credit card, he or she can become an authorized user on that account.
They’ll have access to a credit limit determined by the primary account holder, and as the account holder makes on-time payments, their credit score should improve. A credit score can plummet if the primary account holder fails to make payments.
Get a low-limit credit card
Charging small items to a credit card and then paying it off in full every month builds credit in no time. Consider a card with a $200 limit. Make a point to charge $50-$75 per month on it, never maxing out the limit. Then, pay the balance in full. The card holder's credit rating will increase within just a few months.
Pay their bills on time
The most important thing you can do when establishing credit is to pay your bills on time. Every single one. Even one late or missed payment can cause your score to drop, and it will stay on your credit report for years. That’s why it’s important to ease into using credit and not take on more than you can afford.
Know the fine print
Knowing the specifics of a credit card agreement can help you avoid unexpected fees and keep track of your payments. Different credit cards will have different interest rates and potential fees. Before using the card, encourage your young adult child to read through the agreement to understand when they will be charged a fee, how interest will be applied to the account, and when that interest rate will increase. Choose a card that fits your young adult child's spending habits and financial goals.
Monitor your report
Federal law entitles you to a free copy of your credit report every year. Make sure everything on the report is accurate and contact the reporting agency to dispute any mistakes.
Why building credit is important
A 2018 study by LendingTree found the average consumer could save more than $45,000 over a lifetime of common debts if their credit score was very good (740-799) versus fair (580-669).
No matter which credit-building option you choose, the most important thing is to use credit wisely so that you don’t go from no credit to bad credit.
With so many options out there, planning your financial future can be a confusing journey. To learn what’s needed to build a good credit score, contact U1 Member Support at (800) 543-5000 option 0 or email memberservices@u1cu.org. Member support is available from Monday to Friday from 9 a.m. to 5 p.m. and on Saturdays from 9 a.m. to 12 p.m.