Why Is It Important to Establish Credit When Young?

Dear OZY,

Establishing credit and learning to use it wisely when you are young can make your transition to adulthood much easier. It can help prepare you for many firsts, such as your first apartment, car loan or mortgage and even your first job.

Why Establishing Credit When Young Is Important

A positive credit history is about more than just being able to use a credit card to buy things.

As a truly independent adult, you will need to be able to rely on your credit history for everything from getting a cellphone and utilities in your name to qualifying for the best car insurance rates. Your credit history will play a big role in whether your applications are approved. It will also determine how high your interest rates will be and whether you are asked to pay additional security deposits.

Landlords may check your credit when approving your apartment application, and it will be critical for buying your first car so you can get to work every day. Your credit history—but not your credit scores— may be considered by potential employers when you are looking for your first job.

It takes time to build a credit history, and it can be more difficult to be out on your own if you delay. That's why it's important to begin building a strong credit history as early as you can. Without an established credit history, it becomes more difficult and potentially costlier to get an apartment, a credit card or a loan.

How to Begin Establishing Your Credit

If you've never had credit in your name before, lenders may be reluctant to approve you for an account without a cosigner. Still, there are several ways to start establishing credit when you are just starting out:

• Authorized user and joint accounts: Having your parents or another loved one add you as an authorized user or joint credit card account holder is an easy first step toward building a positive credit history. Equally important, they can help you review the monthly statements and perhaps even help make payments. Learning about the entire credit process, from making a charge to paying the bill, will help you manage credit well when you get out on your own. Understanding the responsibility to make every payment on time is the key to using credit to work for you, rather than becoming overwhelmed by debt.
• Secured cards: If you don't have a cosigner, consider applying for a secured credit card. With a secured card, you give the bank a certain amount of money as a deposit in exchange for a credit card you can use to make purchases. If you use the account responsibly, the lender may eventually convert it to a traditional credit card account.
• Experian Boost^®ø: This free service allows you to add your on-time utility, cellphone and Netflix^® or other streaming service payments to your Experian credit report. Experian Boost can be especially beneficial for those who have scores below 680 or those who have what is considered a " thin file" of fewer than five credit accounts on their credit report.
• Experian Go™: Consumers with no credit may now be able to establish a credit report within minutes and begin building their credit history right away with Experian Go™. Simply download the Experian app and enroll in Experian's free membership to get started.

Stay Smart When Applying for Credit

Many credit card companies send out credit offers to consumers they've already prescreened to see if their credit history meets their risk requirements. If you don't have a credit history, you may not get these offers.

That doesn't mean you should complete every credit card application you receive, however. Be selective. Consider how you can use credit to your advantage and only apply for accounts that offer the incentives and services you want and need. Those might include low interest rates, low or no annual fees, or even airline miles you can use to travel home between semesters. If there's an annual fee, be sure the benefits are enough to justify the cost.

There's no harm in throwing away preapproved credit offers, either. If your credit history remains the same (or improves), more are likely on the way. When you do open an account, be careful not to spend more than you can afford. A maxed out credit card will be harder to pay off and may even take a toll on your credit instead of helping to improve it.

Responsible credit use while you are younger can build a strong credit history that will help you get your adult life off to a strong start when you set out on your own.

Thanks for asking.

Jennifer White, Consumer Education Specialist