Written by: M Katie Helle, CPA
Credit plays a big role in your financial future, affecting everything from renting an apartment to getting a loan. For teens and young adults, building good credit is essential for financial security and achieving major life goals. Here are simple steps to establish and maintain healthy credit.
Step 1: Understand How Credit Works
Credit is essentially borrowed money that you agree to repay later, often with interest. Credit scores—typically ranging from 300 to 850—indicate how reliable you are at paying back money. Lenders use credit scores to decide if they’ll approve loans or credit cards and what interest rates to offer. A higher score generally means better terms, which saves you money over time. Key factors in your score include payment history, credit utilization (how much credit you use compared to your limit), and the length of your credit history.
Step 2: Start with a Secured Credit Card or Become an Authorized User
For those new to credit, a secured credit card can be a great way to start. Secured cards require a refundable deposit, which becomes your credit limit. As you use and pay off the card responsibly, you build a positive credit history. Alternatively, ask a trusted family member if you can be added as an authorized user on their credit card account, allowing you to benefit from their positive credit history.
Step 3: Pay Bills on Time, Every Time
A strong payment history is the biggest factor in a good credit score. Late or missed payments negatively impact your score, so always pay on time. Set up automatic payments or reminders to ensure you never miss a bill. Even small bills, like phone or utility payments, matter if reported to credit bureaus.
Step 4: Keep Credit Utilization Low
Credit utilization is the percentage of your available credit that you’re using. For example, if you have a $500 limit and a $250 balance, your utilization is 50%. To boost your credit score, aim to keep utilization below 30%. Paying off your balance in full each month is ideal; if you carry a balance, keeping it low can still help build healthy credit.
Step 5: Check Your Credit Report Regularly
Reviewing your credit report helps you spot errors and understand what lenders see. You’re entitled to a free credit report from each of the three major bureaus—Equifax, Experian, and TransUnion—annually through AnnualCreditReport.com. Checking your report ensures that it accurately reflects your financial habits and can help you catch and resolve issues quickly.
Building healthy credit from a young age sets the foundation for financial success. By understanding credit, using a secured card or becoming an authorized user, paying bills on time, keeping credit utilization low, and regularly checking your credit report, you can establish a strong credit history. Good credit offers more financial opportunities and flexibility, so start building these habits today.