How to Build Credit as a Young Adult

Establishing credit early in life is an important step toward financial independence. As young adults begin to take on responsibilities such as renting an apartment, applying for a car loan or seeking employment, having a credit history becomes increasingly relevant. Without a credit history, it can be difficult to qualify for loans or secure favorable terms.

Credit scores are used by lenders to evaluate the likelihood that a borrower will repay debt. For many young adults, obtaining a credit card can be a practical way to start building credit and laying the groundwork for future financial decisions.

Understanding Credit Scores

A credit score is a numeric representation of an individual's creditworthiness. It is based on a person’s profile of active accounts, total debt and repayment behavior. Credit scores range from 300 to 850 and are used by lenders to determine eligibility for loans, new credit cards and other financial products.

Credit scores are not only used to qualify for credit, they also reflect how well an individual manages their debt. A higher credit score can lead to better loan terms and lower interest rates, which can result in significant savings over time.

Credit scores are generally categorized as follows:

• Excellent: 800 - 850
• Very Good: 740 - 799
• Good: 670 - 739
• Fair: 580 - 669
• Poor: 300 – 579

Factors That Influence Credit Scores

The primary factors used to determine a credit score are your payment history, amounts owed, length of credit history and your credit mix:

• Your payment history has the largest weight in determining your credit score. This is why it is important to pay your credit card bills on time. Late payments, especially those that are significantly overdue, can negatively affect a credit score.
• Amounts owed are measured by credit utilization, which is the percentage of available credit that is currently being used. Keeping utilization low is generally viewed positively by lenders.
• The length of credit history is important because it provides more data to assess financial behavior. A longer history can demonstrate consistent and responsible use of credit.
• Your credit mix refers to the variety of credit types an individual has, such as installment loans and revolving credit. A diverse mix can indicate the ability to manage different forms of debt.

Steps to Build Your Credit Score

To help start building your credit score, here are a couple steps to guide you.

Open a Credit Card Designed for Beginners 

Choosing the right credit card is a key step in building credit. Student credit cards are designed for individuals with limited or no credit history. These cards often have lower credit limits and higher interest rates, but they provide an opportunity to begin building a credit profile. Some student cards also offer benefits tailored to student needs. 

Secured credit cards are another option for those who may not qualify for a student card. These cards require a cash deposit that serves as collateral. Payments made on secured cards are reported to the credit bureaus, helping to establish a record of responsible credit use. After a period of consistent payments, individuals may qualify for an unsecured card. 

Make Payments on Time

Timely payments are one of the most important factors in maintaining a good credit score. Missing payments can significantly lower a score and may remain on a credit report for several years. Setting up automatic payments through a bank account can help ensure that bills are paid on time.

Maintain a Low Credit Utilization Ratio  

Credit utilization is the amount of credit used compared to the total available credit. A general guideline is to keep utilization below 30%. For example, if a credit card has a $1,000 limit, the balance should be kept under $300. Lower utilization is viewed favorably by lenders and can improve credit scores.

Determine the Right Number of Credit Cards for You 

The appropriate number of credit cards depends on individual financial habits and goals. For beginners, one or two cards may be sufficient. This allows for credit history to be built without the complexity of managing multiple accounts. As financial experience grows, additional cards may be considered, but it is important to manage each account responsibly.

Monitor Your Credit

Tracking your score and your credit report is essential to building your score as your credit history grows. It is important to regularly review credit reports and scores to understand what lenders see. Additionally, this give you the chance to identify errors or signs of fraud. If inaccurate information is found, it can be disputed to prevent damage to the credit score. You are entitled to a free credit report every 12 months from each of the three major credit reporting agencies: 

• Experian
• TransUnion
• Equifax

Consider a Credit Union for Your First Credit Card

Credit union credit cards offer perks that are suitable for you that can save you money and make managing your finances easier. Here are the main benefits of a credit union credit card:

• Lower interest rates: This means you’ll pay less when you carry a balance on your card
• Fewer fees:  Most credit union credit cards skip the annual fees and tend to have lower late payment and balance transfer fees
• Better customer service:  Since credit unions focus on their members instead of profits, members can enjoy more personal, friendly service and a community-centered approach to banking
• More flexible approval:  Credit unions often work with members who have less-than-perfect credit. They may offer financial counseling to help you manage your card responsibly
• Member-focused benefits:  As a member-owned organization, credit unions put their profits back into benefits for cardholders, like lower rates and better terms

Wrapping Up 

Building credit as a young adult is a foundational step toward achieving financial goals. By understanding how credit scores work and taking proactive steps to establish a positive credit history, individuals can position themselves for success. At California Credit Union, we offer secured credit card options that are designed to help members begin their credit journey with confidence.