As one of the primary factors in your ability to take out credit, it's important that you build a good credit history. Credit scores give lenders a simple way to assess whether you are likely to repay a loan and keep up with monthly repayments.
The higher your credit score, the better chance you have of being approved for credit and getting favorable rates.
However, for young adults with a shorter credit history, scores are often lower. This means that if you want to take out credit in the future, it could be more difficult to get approved, and you will likely have to pay higher interest rates. That's why it's wise to build and maintain a good credit score as early as you can.
Understanding credit scores
A credit score is a three-digit number that demonstrates your creditworthiness. This shows lenders how likely you are to repay a loan on time. As lenders undertake a risk when approving people for loans, credit cards, and other forms of credit, they need to determine the level of risk before approving credit.
Lenders can then decide whether to approve a credit application and what interest rates to apply to it. Credit scores can affect not only your approval chances but also how much you can take out and the total loan term.
Credit scores range from poor to excellent, and a FICO credit score is measured with a number between 300 and 850. In general, a credit score above 670 is considered "good," and anything below 580 is considered "poor."
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
A credit score is calculated according to a variety of factors that show repayment behavior and credit history, including:
- Number of accounts you hold
- Repayment history
- Amounts owed
- Types of credit
- Length of credit history
Good credit scores are awarded to those who show they can manage different types of debt, repay on time, and have a long history of responsible borrowing behavior.
Building credit as a 20-year-old
As 20-year-olds generally have a limited history of taking out credit, your credit scores may be lower than you'd like. However, if you can start to establish good credit behavior early, you will be able to boost your score sooner. The sooner you do this, the easier it will be to take out credit, such as car loans, personal loans, or a mortgage.
Credit history also affects your ability to get a job, as some employers will consider your credit before offering a position. It could also impact your ability to rent an apartment because some landlords want to check your credit before approving you to see if you're likely to pay rent on time. If you have poor or no credit, landlords may even require a larger security deposit to offset some of the risk.
Some ways to build credit as a young adult include:
Opening a student credit card
College students looking to improve their credit will find it easier to get approved for credit cards, specifically for students. If you're not a student, you could also get a secured credit card instead, which typically involves paying a security deposit and taking out only a small amount of credit.
Becoming an authorized user on your parent's credit card
Another way you can start to build a credit history is to ask your parents for help. If your parents have a good credit history, they can add you to their credit card account as an authorized user.
Authorized users can use the card for purchases. However, you will need to pay bills on time and keep the balance low to benefit. As your payment behavior is linked to your parent's credit, it means that if you fall behind on payments, you could risk damaging your parents' credit, too.
Pay student loans on time
If you have student loans, you can build a good credit history by always paying on time each month. Falling behind on payments could negatively impact your score, as payment behavior is one of the key factors that determine your credit score.
Use a credit-builder loan
A credit-builder loan is a product that some lenders offer to help people establish credit. These loans are typically small and work differently from typical loans. Most work by charging you monthly payments with interest, and once you have paid the full balance off, you receive the total loan amount.
It's a simple way to show that you can consistently make monthly payments, even if you don't get the benefits of instant access like you would with a regular loan.
What's considered a good credit score at 20?
At 20 years old, you will likely have a lower score due to the shorter length of credit history and income. The average FICO credit score for this age range is around 679, which is considered "good" or "very good" but is relatively lower than someone older with more credit history.
How to build and maintain good credit
Take out small amounts of credit to start with
In the early days of building your credit, you should aim to start small. Resist the urge to take out more credit than you really need, even if lenders offer it.
By keeping your credit usage low, your repayments are going to be more manageable, and you'll be able to pay off your debt more easily, which will help you build a good credit history over time.
Always pay on time
The best thing you can do to maintain good credit is to show you can make payments on time. Payment behavior is one of the biggest elements that affect your credit score because it's the clearest way to determine whether you're a trustworthy borrower or not. Missed payments can lower your credit score, so always make sure you're making payments on time across all your credit accounts.
Don't take out too much credit at once
Multiple applications for credit in a short space of time is a red flag on your credit report, especially if you're rejected for credit. This signals to lenders that you may be relying too much on credit, which could impact your ability to make payments on time each month.
So, for example, don't take out a personal loan and then a new credit card shortly after. It's usually best to wait a few months between credit applications.
Keep your credit utilization low
Credit utilization is the difference between the total amount of credit you have available versus the amount you're using. To maintain good credit, you should aim to keep that rate below 30% where possible.
Keep an eye on your credit report
As you start to build up your credit history, a good habit is to regularly check your credit report to see if there are any glaring errors or causes for concern. Sometimes mistakes can occur on your report, and the sooner you spot them, the sooner you can rectify them and protect your score from any long-term damage.
You can request your credit report from the credit bureaus — Equifax, Experian, or TransUnion — on their websites.
Start building good credit early
Credit scores affect more than just your ability to take out loans and credit cards. Low credit scores can also hold you back from renting an apartment, getting a job, and one day buying a home.
That's why it's best to start building your credit history as early as you can — and 20 is a great age to start. Even if you're not planning to take out big loans or apply for a mortgage any time soon, starting early will put you in a much better financial position later in life.
