How to Start Building Credit at 20: 10 Tips for Financial Success

If you aren’t ready to open your credit card account, consider asking a trusted family member if they can add you as an authorized user and signer on their credit card. To get added as an authorized user on their card, they must contact their bank or card issuer to make the request. However, have them confirm with their bank that they will report the card's payment history. 

To ensure you build a good credit history, do the following:

• Work together to keep the account in good standing. 
• Don't spend more than you can reimburse the primary account holder for your purchases and any associated interest.
• Agree to a spending limit that allows the primary account holder to make consistent on-time payments. You should know that payment history is the most significant factor in helping you build a good credit history.
• Ensure you don’t borrow over 30% of the available credit line. This is considered utilization and is the second most crucial factor when developing credit.

Overall becoming an authorized user on a family member’s credit card is a great way to build your credit.

2. Apply for a Retail Card

Retail credit cards sometimes have looser application requirements than more traditional credit scores. And it may sound off, but retail cards can help you build credit without a credit card. Retail cards generally have a lower limit than traditional credit cards. This can make applying for a retail credit card an excellent strategy for 20-somethings who want to start building their credit plus take advantage of retail card perks.

Overall, applying for a retail credit card is an excellent way to build your credit.

3. Receive Credit for Paying Your Monthly Bills

If you keep up with your utility and phone bills and that activity is reported to credit bureaus, it could help boost your credit. But you should know that not all phone or utility companies report to the credit bureaus. Conversely, using your credit card to pay your monthly bills could positively impact your credit score, provided you make both payments on time every month.

Another option is to sign up for a tool such as Experian Boost that lets you get credit for paying monthly utility, cell phone, and streaming service bills on time. 

Overall, paying your monthly bills with your credit card each month can have some benefits if you are managing it responsibly.

4. Get a Secured Credit Card for Beginners

If you are trying to build credit in your 20s, a secured credit card can be a great option. Secured credit cards are backed by a cash deposit and usually have more lenient approval requirements.

Overall, getting a secured credit card for beginners is an adequate way to help you build credit. 

5. Take Out a Small Credit-Builder Loan

Credit-builder loans are best for those with no credit, poor credit or those trying to build or improve their credit history. Lenders often view these loans as less risky since you can’t access the funds until the loan is paid — either partially or in whole.

Overall, getting a small credit builder loan is a good way to help you build credit. 

6. Building Credit as a Student

College students can build credit with several types of credit cards. And making payments on student loans can help you build your credit and establish a credit history.

Overall, building credit as a student with a student credit card is a good way to help you build credit. 

7. Get Credit for Your Rent Payments

Unfortunately, credit bureaus don't automatically collect information about rent payments. However, some landlords report this today; in that case, the data is included in your credit report and your credit score. This said, many landlords will allow you to pay your rent with a credit card, which can favorably impact your credit score if you make your payments on time and manage your utilization.

Overall, using your credit card to make your rent payments is a good way to help you build credit. But you must ensure this doesn’t throw your utilization over 30%.

8. Building Credit with a Car Loan

An auto loan can help build your credit score if you make your monthly loan payments on time and in full. However, car loans for people with fair or poor credit can have very high-interest rates.

Overall, a car loan is a great way to diversity your credit mix. However, before taking out any auto loan, ensure you are prepared to make your minimum monthly payments.

9. Building Credit with a Personal Loan

A personal loan can help you build credit, but you might not get the same good terms that you would if you had a more established credit history. That said, there are personal loans for fair credit out there.

Overall, a personal loan can help you establish many aspects that go into your credit score; payment history, amounts owed, credit mix, and new credit. However, you won’t likely be eligible for a personal loan for good credit until you have established a credit score of 670 or higher.

10. Get Credit Counseling

If you are in your 20s and need to repair credit, fix a bad credit score, or rebuild your credit after bankruptcy, then credit counseling might be a good option for you. Credit counseling helps borrowers learn more about consumer credit, money management, debt management, and budgeting.

Overall, credit counseling can help if you have run into financial help. Though it may hurt your score initially, the goal is to learn better behaviors to improve your ability to manage credit in the future.

Why Is It Vital to Start Building Credit In Your 20s?

Credit is vital to purchase a car, rent an apartment, or getting good insurance rates. But building a credit history doesn’t happen overnight. It takes about six months to build a credit score and even longer to build a good credit score.  But applying for credit and establishing a credit history in your 20s is critical to helping you reach your financial goals.

However, due to the Card Act of 2009, you must show proof of verifiable income if you are between 18 and 21. This could be a pay stub, tax return, commission check, or investment statement. This step helps prevent lenders from approving young people for high-limit credit cards they aren’t ready for. So, if you can’t provide one of these income proofs, consider becoming an authorized user on a family member’s card. This will help you establish a credit history that you can grow on once you can build credit on your own.

Common Mistakes Young People in Their 20s Make When Building Credit

Building a good credit history takes diligence and perseverance. Here are some of the biggest mistakes young people in their 20s make when building credit.

Missing Payments 

Your payment history represents 35% of your total credit score. As such, it is imperative that you pay your bills on time every month and that you pay at least the minimum amount due. If a late payment hits your credit report, you can see a dent as big as 180 points.

Using Cards Irresponsibly 

Almost as important as paying your bills on time is using them responsibly. This means that you need to be thoughtful when making new purchases. Driving your balance up too high might make it harder to pay the minimum due. After all, your minimum due is often a percentage of your balance. The higher the amount you owe each month, the more challenging it can be to come up with the funds to pay your bill.

Maintaining a Large Credit Card Balance

Just because you have a $5,000 credit line doesn’t mean you should run your balance up that high. Credit reporting agencies like to see your balance at 30% or less of your credit limit. This ratio is called utilization. A high utilization (balance to credit limit ratio) can impact your credit score by as much as 30%. So if you have a $5,000 limit, keep your balance under $1,500.

Closing Old Accounts to Take Out New Ones

This tip often surprises young adults looking to build their credit. While it might seem logical to close out an account once you have paid it off, leaving that credit line open is better. This strategy ties back to using your cards responsibly and keeping that utilization under 30%. An open credit line with a $0 balance can benefit you.

Applying for Too Many Credit Cards and/or Loan Offers

It can be lucrative to apply for a new credit card, especially when they offer incentives for you. Many retail credit card issuers offer large percentage-off deals for “signing up today.” Or they may give you a cool gift if you apply for their card. But credit reporting agencies keep an eye on new credit to the tune of 10% of your credit score. So be mindful before signing up for an offer and avoid applying for too many credit cards. The best strategy is to maintain a healthy mix of credit lines (an auto loan, a rent, lease, or mortgage line, and maybe one or two credit cards).

8 Tips for Responsible Credit Use In Your 20s

Building your credit history in your 20s is a great way to get you access to the best interest rates and offers when you apply for credit. But responsible use is key. Letting your credit get out of hand can lower your credit score, and it can take a lot of work to build it back up. Here are some tips for responsible credit use in your 20s.

1. Understand What Determines Your Credit Score

Your credit score comprises five factors weighted based on their importance.

• Payment history represents 35% of your credit score
• Amounts owed (utilization) represents 30% of your credit score
• Credit history represents 15% of your credit score
• Credit mix represents 10% of your credit score
• New credit represents 10% of your credit score

2. Display a Sense of Responsibility

Establishing good credit requires responsibility. You can practice good financial decision-making by opening a saving or checking account, putting your name on bills and/or a lease, making timely payments, etc. And these responsible behaviors can pay off in other aspects of your life.

3. Demonstrate Employment Stability

You need to know that your employment status isn't a factor in your credit score. As such, getting a new job or a raise won't improve your score. However, there are some ways that your employment can affect your ability to get credit. For example, lenders consider your employment and income information when you apply for a credit card or loan. 

As a result, you must meet a minimum income threshold to meet their approval criteria. Further, your employment can indirectly affect your ability to get credit if your employment status changes frequently. If you go through a period of unemployment and loss of income, you may struggle to make debt payments on time, making you appear riskier to some creditors.

4. Evaluate Credit Options Carefully

Anytime you are applying for new credit, you must read the fine print. Different creditors have different terms. Look for any potential fees you might pay, such as an origination fee, a security deposit, late payment fees, or even an early payment penalty. Look at the interest rate as well as the minimum monthly payment requirements. If you think you might struggle to meet the minimum payment requirement, then it is best not to apply

5. Build a Credit Mix

Your credit mix refers to your different types of credit accounts. Lenders and creditors want to see that you can manage different types of accounts, such as a credit card, rent or lease policy, student loan, auto loan, etc. Too many credit cards, for example, can indicate that you are a risky prospect. But a healthy balance will look favorable for you.

6. Develop Solid Financial Habits

Developing good financial habits when young can pay off for you later. Here are some good financial habits to live by so that you can demonstrate your creditworthiness and fiscal responsibility. 

• Pay your bills on time every month
• Contribute to your savings account every month
• Check your bank accounts frequently to ensure they are in good standing
• Put money into a retirement plan
• Set aside money for emergencies (separate from your savings account)
• Be mindful when opening up new lines of credit
• Ensure your lifestyle is in line with your income (don’t bite off more than you can chew)

7. Get in the Habit of Monitoring Your Credit 

The Fair Credit Reporting Act allows borrowers to check their credit reports for free at least once per year. All three credit bureaus (Experian, Equifax, and TransUnion) have programs to give you access to your credit score and credit report, but you can also access your credit report for free through annualcreditreport.com. 

Also, many banks and credit card issuers offer free access to your credit score. Check with your financial institution for options, and if you can, monitor your credit score at least monthly.

8. Dispute Errors on Your Credit Report

Check your credit report at least once per year, and if you see an error, file a dispute with the applicable credit reporting agency. Experian, Equifax, and TransUnion all have dispute-filing processes that are easy to follow.

The most common errors that people find on their credit report are:

• Incorrect accounts (accounts you didn't apply for)
• Account reporting mistakes
• Inaccurate personal information
• Mistakenly reporting you as deceased
• Mistakenly reporting you as being on the Department of the Treasury’s Office of Foreign Asset Compliance List of Specially Designated Nationals, referred to as the terrorist watch list, the OFAC List, or the OFAC/SDN List. 

If you find an error, file a dispute with the applicable credit bureau: Experian, Equifax, or TransUnion.

Smart Ways to Build Wealth in Your 20s

While your 20s might be a bit young to start thinking about retirement, it’s never too early to adopt good strategies to help you build your wealth. Here are some things you can do while you are young to set yourself up for financial wealth later.

• Explore job opportunities - This doesn’t mean you should hop from job to job (this looks bad to potential creditors). However, your 20s are a great time to discover what you love so that you can set the foundation for a successful career.
• Pursue multiple income streams - Consider a side hustle like freelancing, tutoring, or starting an online business. Over time, these side hustles could become quite profitable, allowing you to step back while others do the work and you reap the rewards.
• Live within your means with a suitable budgeting strategy - Many financial experts suggest the 50/30/20 rule. 50% of your net income should go to your needs, 30% to your wants, and 20% to your savings. Getting into this habit when you are young can help you build financial responsibility that you’ll take with you wherever you may go.
• Cut down on your debt - Apply the 20/10 rule regarding debt management. No more than 20% of your yearly net income should be spent on your debt, and no more than 10% of your net monthly income should be needed to satisfy your debt repayments. 

Final Word

Building your credit in your 20s will pay off in the long run. The length of your credit history accounts for 15% of your total credit score. So the sooner you start, the better. The key is to be mindful when building credit at 20, ensuring you can take on the responsibility and financial burden. Making your payments on time and keeping your utilization under 30% is critical.

https://www.cnbc.com/select/best-thing-to-do-for-your-credit-in-your-20s/

https://www.chase.com/personal/credit-cards/education/basics/average-credit-score-by-age 

https://www.bills.com/learn/debt/consumer-credit-counseling-pros-and-cons

https://www.experian.com/consumer-products/score-boost.html