On the line: Building and maintaining good credit for young adults

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illustration by Lizzie Jenkins
illustration by Lizzie Jenkins

Credit. You’ve probably heard the word thrown around a few times whether by your parents, your econ professor or the guys singing catchy jingles on TV. And if your curiosity was piqued enough, you may have even asked your parents, your econ professor or Googled “credit” to see just what the big hullabaloo is all about.

If not, that’s not too surprising since credit is not the most scintillating subject out there. However, it is one of the most important concepts a young person entering the adult world needs to understand. How you build and use your credit will impact your future life in a big way.

Credit isn’t too hard to grasp once you know the basics.

What is credit, and why is it so important?

Basically, credit refers to the trust an institution, like a bank, puts in you financially. They trust that if you spend, say, $25 on a new jacket using one of their credit cards, you will pay them back within an allotted amount of time. If you don’t pay them back in time, they charge you higher interest rates, and you become less desirable to other lenders. If you pay on time, however, there are no extra fees and your credibility with lenders rises.

Mark G. Chapman, Wells Fargo’s regional spokesman in Utah, explained, “Credit can impact a lot of areas in a young person’s life, things they may not even realize,” such as leasing an apartment, qualifying for loans, insurance, cell phone contracts and a variety of other things you’ll need now or in the future.

Ultimately, credit affects whether you can get a loan and how much interest you will pay on that loan. It will ultimately affect the likelihood of getting the things in life you need and want.

“People cannot succeed financially if they do not have good credit,” Chapman said. “(It is) the first step to building a sound financial future.”

Adam Hall, a neuroscience major, came to this realization when he tried to finance a new MacBook Pro and was denied. Hall was disappointed at first, but became aware of the importance of credit. Since then, Hall has built up his credit and has even been able to finance a car.

How do you start building good credit?

To build a good credit history so people will extend you credit in the future, you first need to have credit. This may sound a little circular in reasoning, but hang in there, it’s not as hard as it sounds. To start building credit, you need someone, like a bank or another lender, to show a little financial faith in you. For most young people, this comes in the form of a credit card.

It may take a few tries to be accepted, but don’t get discouraged. Applying for a credit card is just one way to get started — there are more options out there.

Jack White, a computer science major, started building credit while in high school with aid from his parents. When he turned 16, he created a joint account with his parents, enabling him to piggy-back off his parents’ good credit to build his own credit.

If mooching off your parents’ good credit isn’t an option, no sweat. There are many people in your situation, and lenders know not everybody has been establishing their credit since infancy. Many banks offer low-limit credit cards and secured credit cards for those with low or no credit. Low-limit credit cards, as the name suggests, offer a low line of credit (around $500–$2,000) for consumers to start building their credit.

Secured credit cards require the consumer to have a specific amount of money in an account as collateral. Many banks, such as Wells Fargo, allow consumers to graduate to regular credit cards once the consumer has proven to be reliable.

What makes a reliable consumer?  

Once you get a lender to take a chance on you, you want to show them you are a reliable investment, which isn’t to hard to do.

“The single most important thing is to make payments on time (because) it makes up the single largest percentage of your credit score,” Chapman said.

Corey Orem, an accountant from Salt Lake City who worked for a credit union from 2002 to 2005, said people who pay their bills on time have the lowest interest rates.

This can come in handy down the road. For example, when Orem first bought his home, he had a 30-year mortgage; however, thanks to the lower interest rates his good credit gave him, he was able to refinance his mortgage and cut it down to 15 years. In plain English, you will pay a lot less money in the long run for paying your bills on time.

On the flip side, Orem said not paying your bills on time will only hurt your credit score. Unpaid bills, such as medical or utilities bills, are sent to debt collectors — information that drastically lowers your credit score regardless of the amount and generally stays on your report for about seven years, according to myfico.com.

Additionally, Orem suggests curbing your credit spending by not maxing out your credit cards or living month-to-month on credit card payments.

“Credit is a lot harder to regain than to keep,” Orem said.

Another tip to keep you looking good to lenders is limiting the number of credit cards you apply to within a short amount of time. Too many credit lines, according to the Bureau for Better Business, may scare away potential lenders. In addition, the BBB warns that too many new lines at once may reduce the average age of your account, which is a key component of determining your credit score.

It’s also a good idea to regularly check your credit report and make any corrections necessary. By federal law you can request a free copy every 12 months. AnnualCreditReport.com is one website that allows you to check your scores from all three credit reporting agencies — Equifax, Experian and Transunion — for free.

Wrapping it up

If you don’t have a perfect financial record, don’t lose hope. It may take time and a bit of sacrifice, but you can rebuild it. If you don’t have credit, start today. It will be worth it in the long run. It may seem tedious, intimidating, boring or any number of negative adjectives, but it’s still important. Understanding credit is essential for your financial health, and using it wisely is what will give you the financial independence needed to step boldly into the adult world.

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