Many young adults know the importance of having a healthy credit score, but not nearly as many know how to establish this credit. According to Experian, Generation Z (18-24) has the lowest average credit score of 680, indicating that younger individuals are still building their credit histories.
There are a handful of approachable ways young adults can work to build their credit scores and set themselves up for financial success.
1. Pay attention to spending
It's important to ensure you are not spending more than you can afford to pay off month-to-month. Avoiding large or unnecessary purchases is helpful, paying on time, and keeping your balance under 30% of your limit are all keys to building credit.
Using a credit card for smaller and/or reoccurring purchases that can be quickly and fully paid off each month will take you a long way toward establishing a healthy credit score.
2. Pick the right type of card
Young adults may notice a lot of credit card options being shared with them—often in-store cards and student-specific credit cards. Researching your options as a young adult looking to open a credit card will help you make the right decision for you. For example, secured cards are a great way to build credit history with low risk—your limit is tied to a savings account, so you can establish a history of payments without actually going into debt.
Things like the interest rate will also be worth considering. Check to see what promotions are running on certain cards, such as a "12-month no interest" deal, especially if you may be making bigger purchases and want to spread the cost over time. Interest rates are always an important factor to consider, so you’re prepared if you decide to carry a balance at some point.
3. Understand the benefits of your card
When used wisely, credit cards can be a life-long investment that continues to help you build credit. There are potential benefits when you pay on time and keep balances low. Some cards offer discounts on flights, cash back, and more. Consider these things when looking for a card that fits you.
4. Preparing to diversify your portfolio
A credit card alone will not be enough to establish a high credit score. A diversity of loans, such as mortgages and installment loans, will be crucial to helping grow your credit score. While these loans may not seem approachable or necessary now, it's always good to think ahead and start planning for your financial goals.
