As you enter your twenties, there are a lot of new financial responsibilities and things you need to start thinking about that you just didn’t have to worry about as a teenager — like paying rent on time, budgeting your finances, getting your first credit card, and building credit.
Financial conversations about credit cards, credit scores, and building credit may seem intimidating as you enter your twenties, especially since it’s unknown territory for many. In fact, fewer than 25% of high school students are required to take a personal finance course, and Gen Z has the lowest financial literacy of any other generation. However, financial conversations shouldn’t be daunting, and thankfully, building credit is something relatively easy to start. You can build a high credit score fairly quickly, and it is better to begin building a history of credit sooner rather than later.
Read on to learn the ins and outs of what a credit score is and why it’s important to build credit now in order to secure your financial future.
What is a credit score?
According to the Consumer Financial Protection Bureau, a credit score predicts how likely you’re to pay back a loan on time. A credit score is required to qualify for jobs and rent an apartment or house. You’d think they’d teach us this stuff in school!
Your FICO score breaks your credit into five parts: accounts owned, new credit, length of credit, payment history, and credit mix. These hold various percentages, affecting your credit’s overall strength. Lenders want to make sure you are not a liability and will be able to repay your loans, which is why you may be asked for your FICO score when applying for apartments or rentals.
Why is building credit in your twenties important?
Your credit score influences the way you interact with society. Getting a credit card and building credit may seem like a task you can put off for when you’re older, but establishing a credit foundation early on in your life is crucial. According to One Main Financial, “The longer you have credit, the better your chances of achieving a higher score will be; that’s why it’s so important to start building credit while you’re young.” A high credit score gives you greater negotiating power and enables you to borrow money more efficiently. Good or high credit scores indicate to loaners that you make intelligent decisions and are responsible.
Gen Z already understands the importance of this, as studies show that 50% of Gen Z has a credit card and a prime credit score. The survey, which Transunion conducted,examined 33 million Gen Z consumers who opened a traditional lending product, such as a credit card, auto loan, mortgage, personal loan, or student loan, deeming them “credit active.” Thankfully, despite being one of the more financially illiterate generations, Gen Z is already ahead of the curve when it comes to building credit. If you’re interested in trying out a new credit card or getting your first one, look at this “Best Student Credit Cards of August 2022” list by Forbes. Some great student credit cards to consider, according to the list, include Discover, Deserve EDU, and Bank of America.
But how do you begin building credit once you get a credit card? Her Campus spoke with Steve Wilson, founder of Bankdash, who breaks down some common credit card myths and explains how to start building credit.
“According to my study, over half of Americans believe that having a small credit card debt rather than paying it off monthly is better for their credit,” Wilson tells Her Campus. “However, all it does is make you pay interest.”
Wilson encourages all young people to follow this strategy in terms of building credit: “Make a few smaller monthly payments or schedule payments to coincide with a paycheck or other infusion of cash. Maintaining low credit use, which significantly impacts scores, is possible by regularly decreasing card balances rather than waiting for the monthly statement.” Wilson’s research has proven this strategy to improve and maintain a good credit score.
The key objective to building credit in your twenties and establishing good credit is responsibility. Building credit is a great way to exercise self-discipline and challenge yourself to stick to a goal — and more importantly, your older self will thank you for it later.
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FAQs
If you're in your 20s, you probably know how important it is to have good credit. A good credit score may help you get better interest rates if you buy a car or house, lower the amount you pay for auto and home insurance and even make it easier to rent an apartment.
Why is it important for people in their 20s to build a positive credit history? ›
Credit is an important factor when buying a car, renting an apartment and getting the best insurance rates. But building a solid credit history takes time. Establishing good habits early on is key to helping you reach your personal and financial goals later in life.
Is 25 too late to build credit? ›
Fortunately, it's never too late to get started. If you want to stay organized with your finances, knowing how to manage your money and build and maintain your credit is an excellent first step. This could include checking your credit report and creating a budget so you don't carry a card balance.
Can a 20 year old have good credit? ›
What's a good credit score for a 20-year-old? Consider yourself in “good” shape if your credit score is above the average for people in your age group. Given that the average credit score for people aged 18 to 26 is 680, a score between 680 and 690 (the average for people aged 27 to 42) could be considered “good.”
At what age should you start building credit? ›
But while you can't speed up time and jump-start your average credit age, you can set yourself up for success by applying for a good starter credit card at age 18. This will probably be either a secured credit card, a college student credit card (if you're in college) or a credit-building credit card.
What are three reasons why credit is important? ›
Here's a look at how good credit can benefit you.
- Borrow money at a better interest rate. ...
- Qualify for the best credit card deals. ...
- Get favorable terms on a new cell phone. ...
- Improve your chances of renting a home. ...
- Receive better car and home insurance rates. ...
- Skip utility deposits. ...
- Get a job.
So the older your length of credit history, the better the impact tends to be on your credit score. As mentioned, length of credit history is worth 15 percent of your FICO score and around 20 percent of your VantageScore credit score (when combined with your credit mix of revolving vs. non-revolving accounts).
How much debt is normal at 25? ›
Here's the average debt balances by age group: Gen Z (ages 18 to 23): $9,593. Millennials (ages 24 to 39): $78,396. Gen X (ages 40 to 55): $135,841.
Is 750 a good credit score for a 25 year old? ›
A 750 credit score is Very Good, but it can be even better. If you can elevate your score into the Exceptional range (800-850), you could become eligible for the very best lending terms, including the lowest interest rates and fees, and the most enticing credit-card rewards programs.
Is 630 a good credit score? ›
A credit score of 630 falls into the "fair" credit score range for both VantageScore® and FICO® scoring models. Fair is between the higher tier of scores (“good” and “excellent”) and the lower end of credit scores (“poor”).
So, given the fact that the average credit score for people in their 20s is 630 and a “good” credit score is typically around 700, it's safe to say a good credit score in your 20s is in the high 600s or low 700s.
What race has the lowest credit score? ›
Race isn't considered a factor in credit reports, but discriminatory practices negatively impact scores for many people of color. Black and Hispanic communities are more likely to have lower credit scores, income and homeownership than white people.
How many people have an 800 credit score? ›
22% of U.S. Consumers Have Exceptional Credit
| Percentage of Consumers by FICO® Score 8 Range | |
|---|
| Range | Percentage of Consumers |
|---|
| Good (670-739) | 21.6% |
| Very good (740-799) | 28.1% |
| Exceptional (800-850) | 21.9% |
2 more rowsApr 17, 2024
If you're interested in building your child's credit before they turn 18, you can explore adding them as an authorized user to one or more of your credit cards. There is no legal minimum age for adding a child as an authorized user, however you should check your credit card issuer's policies.
Is 22 too late to build credit? ›
Yes, a 22 year old should get a credit card, as this is one of the best ways to build a good credit score. You don't even have to make any purchases with a credit card to benefit, as simply keeping an open credit card account is enough to build credit.
What is considered an excellent credit score? ›
What are the full credit score ranges?
| FICO Credit Score Ranges | |
|---|
| Excellent/Exceptional | 800-850 |
| Very good | 740-799 |
| Good | 670-739 |
| Fair | 580-669 |
1 more rowApr 2, 2024
A strong credit history, reflected in good credit scores, will let you qualify for lower interest rates and fees, freeing up additional money to set aside for emergencies, retirement, and other smaller unexpected expenses. Decreasing debt and increasing savings reduces stress and leads to greater financial freedom.
Why is it important for a person to rebuild their credit history? ›
Better chance for credit card, mortgage and loan approval
Whether it's a loan, credit card or mortgage you're after, a higher credit score means you'll have a better chance of being approved. You may also be able to choose from a wider range of credit offers and providers, which can help save you money.
Why having a good credit score is important for adulthood? ›
Here's why: Establishing a solid credit history is crucial for financial success. A good credit score opens doors to better loan terms, lower interest rates, and increased financial opportunities.
Why is it important to have a credit report history? ›
Lenders use these reports to help them decide if they will loan you money, what interest rates they will offer you. Lenders also use your credit report to determine whether you continue to meet the terms of an existing credit account.
