Q: At what age can a young person begin building a credit profile and score?
A: Typically, you begin building a credit file at the age of 18, which is also the time you can apply for a credit card, student loan, auto loan, etc. on your own. However, there are ways to start your credit history at an earlier age, such as becoming an authorized user on a parent’s credit card.
Q: Are there any specific age milestones to pay attention to as someone turns 18 and then 21?
A: While there are no age-specific milestones, applying and opening a credit card is an important first step toward building a healthy credit history and working toward a desirable credit score, which can be done as soon as someone turns 18. However, the CARD Act of 2009 requires everyone under the age of 21 to either have a co-signer when opening a credit card, or demonstrate their ability to pay. Someone with a full-time job may be able to meet the ability to pay qualification, but more than likely students will need to rely on a co-signer.
Additionally, as college students get older, they will likely have more expenses like paying rent, a monthly phone bill, utility payments, and possibly car payments, which can potentially all help build their credit if payments are consistently made on time. If accounts go into collections or delinquency, they will be appear on your credit report.
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Q: What are some of the most impactful moves when it comes to extending a young person's credit profile and building a good score quickly?
A: A credit reporting agency needs a track record of how you’ve managed credit before it can calculate a credit score. Typically, six months' worth of activity will provide enough information to generate a score. As your credit history increases, your score might rise or fall based on how you pay your bills over time.
Applying for many new accounts at once will generate multiple hard inquiries, which could indicate a lot of debt/repayment responsibilities to a perspective lender. It may be best to apply for one manageable credit card – such as a student or secured card, particularly if you need to rely on a co-signer who may not want to open themselves up to more debt. Don’t be swayed by freebies when selecting a card – take the time to research, read the fine print and consider factors like annual fees, payment grace periods and interest rates.
It can be helpful to keep your credit card balance low, and only use around 30 percent of the available credit limit. This suggests to creditors that you can use credit responsibly and do not rely too much on it. Paying your bills on time and in full each month will show that you are reliable and more likely to pay back debts. If accounts go into collections or delinquency, they will be appear on your credit report.
Finally, be sure to monitor your credit reports. Credit scores are calculated from the information in your credit reports, so if there’s something inaccurate in your report, your score could suffer. Through AnnualCreditReport.com, you’re entitled to a free copy from each of the three major credit bureaus once a year, so you can make sure they don’t contain any inaccuracies or show any signs of fraud. There are also free monitoring programs available, such as TrueIdentity by TransUnion. For no charge, TrueIdentity will allow you to check your credit report as often as you would like, receive instant alerts if someone is trying to open credit in your name and allow you to lock your report with a single swipe. In addition, some credit cards or banks will offer free credit score access so you can track your progress.
Q: Is there an average credit score that you frequently see for those just getting started?
A: The average score for all scoreable consumers aged 18-29 in the TransUnion database is 640. This is as of June 30, 2018 and it’s based on VantageScore 3.0.
Q: What are some of the biggest mistakes young people typically make which get them off on the wrong foot?
A: When looking to first build credit, it’s important to select a credit card or loan with a reasonable interest rate and fees. Don’t be swayed by freebies – take the time to research, read the fine print and consider all of the factors. In some cases, a credit card with perks like cash-back may be the right fit, but in others, it may be better to start with a student card.
The most important factor is not to over-extend on your ability to pay the credit card or loan payment. If you are granted a high limit on your card, you should still only spend what you can afford. You do not want your card or account to go into delinquency or sent to collections, which will both appear on a credit report.
Another common issue occurs with students who have recently moved to a new residence. Before applying for any form of credit, check your report to ensure if the new address is on file. Students apply for credit with their new address and their credit report does not have a record of them living in this location, as their driver’s license or other identifiers such as utility bills are at a previous residence. If the creditor can’t verify they live at this location, the application may be declined.
Finally, monitoring your credit report on a regular basis is key. You are building a story of your responsibility, and developing a habit of monitoring your credit information is healthy and advisable to ensure that everything on your report is factual.
Q: One tip I've heard is that a parent can put a child on their credit card as an authorized user and that can sometimes (with some cards) contribute to a child's credit history. Is that true? What kind of cards should we be looking for?
A: Adding your child as an authorized user is one way to help them begin building a credit score if you yourself have a good credit. With some credit cards, the entire account history can show up on the authorized user’s credit report, so you’ll want to select a card where you have a good credit history. While there are many different credit scoring models available, the most commonly used scores — FICO 8 and VantageScore 3.0 — factor in authorized user accounts when calculating a score. Determining if an authorized user account is right for you is a personal decision — as the card holder you are responsible for any charges on the card, so be sure that you set some guidelines in advance.
Q: Is it true that if your parent has a good credit score and makes you an authorized user on one of these shared credit card, that your credit score can get a boost by association?
A: [see above]
Q: Is it true that all hard credit inquiries/new credit account requests within a two-week period count as one inquiry, so someone who is setting up a new household, for example, can do so without sustaining too much credit damage?
A: Generally speaking, it’s a good idea to limit the number of hard inquiries, but credit score models are designed to accommodate good financial sense, such as shopping around for the best interest rate when it comes to mortgage and auto loans. When made over a short period of time, typically a credit scoring model would count these loan inquiries to be one credit inquiry for scoring purposes. However, this does not apply to utilities, so someone setting up a new household, would see inquiries from each separate entity. While a hard inquiry will remain on a credit report for 24 months, it only affects your score for the first 12 months.
Q: When it comes to automated payments, do those set up to draw from a bank account (in a debit situation) register with credit agencies, or are payments on credit cards the only things you see?
A: You cannot build your credit when using your debit card or bank account because you are not borrowing money. When these types of automated payments are drawn, the money for the purchase comes out of your bank account so you haven’t used credit. The same applies to prepaid debit cards, which are identical to debit cards with one exception — you use your own money to buy the card. However, if you are using the bank draw to pay a bill, such as your credit card statement or a loan payment, then you are still receiving the potential benefit to your credit score if you make your bill payment on time and pay at least the minimum balance.
Q: Is there a best way to start repaying student loans to get maximum credit-score benefits?
A: If you haven’t yet established credit and have student loans, starting on-time payments on those loans is a great way to build credit. It is recommended, like all bills, to pay your student loans on time every month to help build a positive credit history.
Q: Should college students begin paying their own utility bills, for example, or Netflix or Spotify or other accounts? Would they have trouble setting up such subscriptions, independently (assuming they don't have much of a credit history).
A: Alternative and trended data, such as utility payments, are being used more frequently by credit reporting agencies. Maintaining a good standing on these types of accounts through on-time payments, could have a positive impact on your credit report if these types of data are being considered. At this time, payments to monthly services like Netflix are not part of a TransUnion alternative data analysis. However, if the student sets up the account and pays the related credit card bill on-time each month, it can impact their score in a positive way. Alternatively, if they do not pay their bills, and they become delinquent, it will impact their score.
Q: Are secured credit cards advisable? Are some better than others in terms of reporting to credit agencies? (Discover vs. Green Dot, for example)
A: Secured cards can be a good tool for someone with a poor credit history who is looking for an opportunity to rebuild a positive line of credit. These cards require collateral for approval, and credit lines are usual low – in line with the value of the collateral provided. A low limit can help prevent excess spending, but could also limit your ability to access credit when you need it. There may also be additional fees associated. Banks offering secured credit cards do report payment activity to the credit reporting agencies, so if you manage your account responsibility, it could help to improve your score.
However, if you are a student looking to build credit (versus trying to repair poor credit) a student card may be a better fit. Student cards will typically have standard features, such as low interest rates, but are also designed to help people who are enrolled in school build credit for the future. While they may have minimal rewards compared to a more traditional card, if managed well they can lead to more creditworthiness in the future.
As with any financial transaction, you might want to shop around and compare cards from various lenders to find the best possible terms and the right fit for your situation.
Q: What would you advise your own child to do each year during college in order to get the strongest possible start? What are the most important things parents can be doing to get their kids on the right path at this delicate point?
A: One of the most important aspects in achieving good credit health is payment history, because it shows how you’ve managed your finances, including any late payments. Making on-time payments is a crucial part of building good credit. By opening a credit card, keeping your balance low and making on-time payments, you can begin to build a positive credit history. Be sure not to overextend yourself – only charge what you can afford. If you are not able to pay a credit card bill off in full, use 30 percent of the credit limit – or less – as a guide to ensure you maintain a low utilization rate. Finally, if you are renting your home, find out if the landlord or property manager is reporting rental payments to the three Credit Reporting Agencies. Having on-time payments posted to your report each month can help with a positive score when alternative data is being considered in the credit report.
As a parent, if you are opting to co-sign for a credit card for your child (required by the CARD Act of 2009 for anyone under 21 who cannot demonstrate their ability to pay), you need to understand that you are taking on the responsibility for the debt incurred if the student doesn’t pay their bill. Using a student or secured card, with a lower credit limit, could help protect you as the co-signer from incurring large amounts of debt.
Q: What kind of credit score should a young person be shooting for in order to fulfill the goal of this article, which is to pass a credit check and be able to sign a lease on an apartment without a co-signer?
A: We encourage everyone - -young adults included – to focus on learning good habits for sustained financial health. Landlords, creditors and others look at your behavior history to assess your level of responsibility and whether they can trust you to take care of their asset or make on-time payments. Focus on these behaviors, monitor and track the information being reported, and protect your data.