Dear Credit Starter,

Why should young adults care about building credit early?

  • From Jack

Dear Jack,

Building credit is important because it is a necessity throughout your life. There are many circumstances in the future that would go smoother if you have a good credit history.

 

Why Building Credit Early is Essential

Having a positive credit not only allows you to buy things with a credit card, but it could also be involved in the employment process. After you graduate, it is likely that you would be looking for your first job. Employers take your credit into account when reviewing your application. Having a negative credit history could negatively impact your chance of being hired.

Some examples would be that when they look at your credit history and see a lot of late payments, it may indicate your personality of not being responsible and shows no signs of trustworthiness and credibility. Having a big amount of debt and not controlling your expenditure will tell the employers that you have financial problems. They may view you as more likely for theft and fraud. Furthermore, the inability to handle personal finance shows that you may not be a good fit for a job that is in the financial field such as bank investment. If you can’t handle your own money, it is most likely that you can’t for the employer’s customers as well.

In order to prevent these problems, it is important that you monitor your credit report and make sure that they are in good condition.

Here’s how:

  • You should pay all your bills on time. Even one late payment can negatively impact your credit score.
  • Don’t use up all your buying power or credit. This shows that you are not excessively spending your money and that you have good control of yourself financially.
  • You should check your credit score regularly from credit reports so that you can potentially spot problems before hugely impacting your credit score.

Usage of Credit Score in Other Situations?

The credit score is most likely to be checked when you are in situations that require loans. In the future as a young adult, it is most likely that you would be planning to buy an automobile, a home, or getting a master’s or doctoral degree. All of these require a large sum of money and may need loans to fulfill these wishes.

In the simplest case, if you don’t have good credit, you might not even be able to be granted credit to make these payments. Insurance companies may not even be willing to provide any insurance. Furthermore, even if you are granted the credit for these purchases, having a negative credit history will cost you more money for buying an apartment for instance. The reason is that companies will charge a higher interest rate because of the lower credibility shown from your credit history.

By using myFICO’s loan calculator, the table below shows the correlation between FICO score and interest payment. The base scenario is a $200,000 which would be paid within 30 years.

Credit Report, a credit score of 760 and substantially help save a lot of money

How your credit score impacts interest rates and payments

FICO score Interest Rate Monthly payment Total interest paid
760 4.2% $980 $150,830
700 4.4% $1,000 $160,210
680 4.6% $1,020 $167,770
660 4.8% $1,050 $177,020
640 5.2% $1,100 $195,940

 

The interest rate differs by 1.6% between the credit score of 760 and 620 respectively. 1.6% could be a substantial percentage, especially when a large amount of loan is borrowed.

Even if you are not planning to buy an apartment, the landlord will check your credit score to decide whether if they want to rent the place to you.

 

How to Start Building your Credit?

Now that you have understood the importance of building credit, we will show you some ways that you can start creating a positive credit history.

Before getting started, make sure that you request a credit report first to make sure that no one is stealing your identity. It is possible that there are criminals that have established credit history of you even if you are not the person who has created it.

Applying for a credit card may be one of the easiest ways to start building credit. Although qualifying for one may not be as easy as you have thought. Becoming a joint user of another person’s credit card may be a good way to start. But you need to make sure that it is someone that you could trust, such as your family, as the risk is shared.

You could also apply for a secured card if you are not able to find a cosigner. You will need to deposit a certain amount of money in the bank so that you can make any purchase. In the long term, if you are able to keep up a good credit history, you would be able to convert your secured card into the traditional credit card.

Credit Starter

If you are still not sure how to start or want to find someone to help you build your credit smoothly over a duration of time, Credit Starter is here to help. We streamline your credit building experience by using your rent and tuition payments to build your credit.  We take rental data and delivers them to the Credit Bureau partners (Equifax and TransUnion) to build credit score over time.

 

Credit in Credit Starter, start building your credit in credit starter early as a college student