If you’re a recent college graduate and you’ve moved back in with mom and dad, you’re not alone. In 2012, 36% of American adults ages 18-31 were living with their parents, according to a 2013 report from the Pew Research Center.
Bunking in your childhood bedroom to save money can be a smart move, but it’s important to take steps toward creating an independent financial life. This means working hard now to build your credit so that you can strike out on your own when you’re ready.
Not sure why good credit is important or how to achieve it? Take a look at the details below for everything you need to know.
Moving out someday depends on a solid score
First, some background: Your credit score is a three-digit number used by lenders and others to gauge how responsible you are with borrowed money. It ranges from 300 to 850, with higher being better. Your credit score comes from the information that’s on your credit report, which is a document that contains detailed information about how you’ve handled borrowed money in the past.
It’s a common misconception that having good credit is only important if you’re interested in applying for a big loan. A high score will help you get the best possible terms on an auto loan or mortgage, but your credit will also be checked when you shop for an insurance policy, set up utilities or submit a rental application for an apartment.
All this means that being able to move out of your parents’ house someday is dependent on having solid credit.
Building good credit begins today
Creating a positive credit history relies on knowing the factors that influence your credit score. Your FICO credit score, which is the most widely used score in the United States, is weighted as follows:
- Payment history – 35%
- Credit utilization – 30%
- Length of credit history – 15%
- Mix of accounts – 10%
- Credit inquiries – 10%
For young adults, the length-of-credit-history factor tends to be a big bugaboo. If you’ve managed to skirt student loans and have never borrowed money otherwise, your credit profile is effectively nil. Consequently, your score won’t be very high.
The easiest way to remedy this is to get a credit card right away, and start using it consistently and responsibly. This will help you get some credit experience under your belt now, while your expenses are manageable and you don’t yet need to lean on a good score to get by. When you’re ready to spread your wings, you’ll be in a good position to get an apartment, a new car or perhaps even a home loan.
A starter card to consider, plus a few tips for handling plastic responsibly
The Nerds like this card for credit newbies because its rewards program is straightforward, its annual fee is $0, and many folks have been able to qualify without a long credit history. All of these features make it a great choice.
But no matter which credit card you choose, be sure to follow these tips for responsible plastic use:
- Pay your bill on time every month – no exceptions.
- Pay your balance in full every month – no exceptions.
- Never use more than 30% of your available credit at any point during the month.
- Log into your online account about once per week to review your transactions. If you spot one you didn’t make, contact your issuer immediately.
- Take steps to avoid common fees. Paying on time, avoiding cash advances, and using a card that charges no foreign transaction fee when you travel are all smart ideas.
Finally, be sure to check in with the Nerds as often as you can. We’ve got lots of credit card tips and tricks to share!
Mother and daughter image via Shutterstock