What is Credit?

As a young adult, it is important to understand the role that credit plays in your financial life. While credit can be a useful tool for building a strong financial future, it can also be a source of financial stress if not used wisely. In this blog post, we will discuss some tips for young people on how to utilize credit wisely and avoid potential pitfalls.

First, it is important to understand what credit is and how it works. In simple terms, credit is a loan that allows you to borrow money from a lender to make purchases or pay for services. The lender then charges you interest on the amount you borrow, which is a fee for borrowing the money. This means that, when you use credit, you agree to pay more for the goods or services you are purchasing to pay for them now rather than later.

Different Types of Credit

One of the most common ways that young people use credit is by applying for a credit card. A credit card is a type of loan that allows you to make purchases on credit and pay for them later. When you use a credit card, you are borrowing money from the credit card issuer, and you will be charged interest on the amount you borrow.

One of the key benefits of having a credit card is that it can help you build a credit history. Your credit history is a record of your credit activity, including the types of credit you have, the amount you borrow, and your payment history. A strong credit history can be beneficial in several ways. For example, having a good credit history can make it easier for you to get approved for loans or credit cards in the future, and it can also help you get lower interest rates on those loans or credit cards.

5 Tips to Use Credit Wisely

However, it is important to use credit cards wisely to avoid potential pitfalls. Here are some tips for young people on how to utilize credit wisely:

1. Only borrow what you can afford to pay back. Before you apply for a credit card, think carefully about how much you can realistically afford to borrow and pay back each month. It is important to only borrow what you can comfortably afford to repay, as failing to make your credit card payments on time can have negative consequences for your credit history and your overall financial health.

2. Be mindful of your credit utilization ratio. Your credit utilization ratio is a measure of how much of your available credit you are using. For example, if you have a credit card with a $1,000 credit limit and you have a balance of $500, your credit utilization ratio is 50%. It is recommended to keep your credit utilization ratio below 30%, as higher ratios can have a negative impact on your credit score.

3. Pay your bills on time. One of the most crucial factors in your credit score is your payment history. This means that it is crucial to make all your credit card payments on time, every time. If you are having trouble keeping track of your due dates, consider setting up automatic payments to ensure that your bills are paid on time.

4. Avoid using credit for unnecessary expenses. While credit can be a useful tool for paying for things you need, it is important to avoid using credit for unnecessary expenses. Using credit to pay for things that you do not really need can quickly lead to excessive debt and financial stress.

5. Monitor your credit report regularly. It is important to regularly check your credit report to make sure that the information it contains is accurate and up to date. You can get a free copy of your credit report from each of the three major credit bureaus (Experian, Equifax, and TransUnion) once a year. By checking your credit report regularly, you can catch any negative impacts to your score to solve them as quickly as possible.

Establishing Credit Early

If you are a young adult just starting out in the world, you may be wondering if getting credit at an early age is a good idea. After all, the prospect of having to pay back loans or credit card bills can be intimidating, and you may be worried about damaging your credit score before you even have a chance to establish it.

But the truth is that getting credit at a young age can be incredibly beneficial. Here are just a few reasons why:

1. It can help you build a good credit score.

Your credit score is a crucial factor in your financial life. It determines how likely you are to get approved for loans, credit cards, and other financial products, and it can even impact your ability to rent an apartment or get a job.

One of the main ways to build a good credit score is by using credit responsibly. This means using credit cards and other forms of credit, making your payments on time, and keeping your balances low.

By getting credit at a young age, you can start building a good credit score early on. This will give you a solid foundation to build upon as you move forward in your financial life, and it can make it easier to get approved for loans and credit cards in the future.

2. It can help you establish a credit history.

In addition to your credit score, lenders and credit card companies also look at your credit history when deciding whether to approve you for a loan or credit card. Your credit history is a record of your credit usage over time, including the types of credit you have used, how much credit you have borrowed, and how well you have managed your payments.

Having a long credit history can be beneficial because it shows that you have experience using credit responsibly. This can make you a more attractive candidate for loans and credit cards, and it can help you get better interest rates and terms.

By getting credit at an early age, you can start establishing a credit history early on. This can make it easier to get approved for credit down the road, and it can help you get better interest rates and terms on loans and credit cards.

3. It can give you access to credit when you need it.

There may be times in your life when you need to use credit to make a large purchase, such as a car or a home. If you do not have any credit history or a good credit score, you may not be able to get approved for the credit you need.

By getting credit at a young age, you can build up your credit score and establish a credit history. This can make it easier to get approved for the credit you need when you need it, and it can give you more options when it comes to choosing a loan or credit card.

4. It can help you learn how to manage credit responsibly.

Using credit responsibly is an important part of managing your finances. It is important to understand how credit works, how to avoid overspending, and how to make your payments on time.

By getting credit at a young age, you can learn how to use credit responsibly. You can start building good credit habits early on, which can help you avoid financial mistakes and set yourself up for success in the future.

5. It can help you build a safety net.

Having access to credit can be helpful in times of financial emergency. If you lose your job, have unexpected expenses, or need to make a large purchase, having credit available can help you get through tough times.

By getting credit at a young age, you can build up your credit score and establish a credit history. This can make it easier to get approved for credit when you need it.

What if I Don’t Have Established Credit?

As a young adult, starting out on your own can be an exciting but also daunting experience. For many, it's the first time they are truly independent and responsible for all aspects of their life, including their finances. However, for those without established credit, the challenges can be even greater.

Having established credit is important for a variety of reasons. It allows you to take out loans, such as a mortgage or car loan, and can even impact your ability to rent an apartment or get a job. Without it, it can be difficult to make major purchases or even access basic necessities, such as utilities or phone service.

But establishing credit is often easier said than done. For many young adults, they may have never had a credit card or loan in their name, making it difficult for them to build a credit history. And even if they have a credit card, consistently making payments on time is crucial for building a positive credit score.

You Have Options

One option for young adults without established credit is to become an authorized user on a parent or guardian's credit card. This allows them to build a credit history by piggybacking on the established credit of the primary cardholder. However, this option is not always feasible and can also be risky if the primary cardholder does not make timely payments.

Another option is to apply for a secured credit card. These cards require a cash deposit as collateral, which acts as the credit limit. While it may be easier to get approved for a secured credit card, it can still be a challenge to come up with the cash deposit, especially for those just starting out on their own. Additionally, the interest rates on secured credit cards can be high, making it even more difficult to manage finances.

Life Becomes More Expensive

Without established credit, young adults may also struggle to secure loans for major purchases, such as a car or home. Even if they can get approved for a loan, the interest rates may be higher due to their lack of credit history. This can make it difficult to manage monthly payments and can impact their overall financial stability.

In addition to financial challenges, having no established credit can also impact young adults in other ways. For example, landlords may be hesitant to rent to someone without a credit history, making it difficult to find a place to live. And without a credit history, young adults may also have a harder time getting approved for phone or utility services.

Overcome The Challenges

So, what can young adults do to overcome these challenges and establish credit? One option is to start small and focus on consistently making payments on time. This could mean getting a secured credit card and making sure to pay the monthly bill on time, or even paying rent and utility bills on time. Over time, this can help to build a positive credit history and score.

Another option is to seek out lenders or credit card companies that are willing to work with those without established credit. Some may offer products specifically designed for those in this situation, such as a secured credit card with a lower deposit requirement or a starter loan with a lower interest rate.

Be Aware, Be Persistent

It's also important for young adults to be aware of their credit score and credit history. Checking their credit reports regularly can help them identify any errors or issues that may be impacting their credit score. And working with a financial advisor or credit counselor can provide valuable guidance and support as they work to establish credit.

Starting out on your own as a young adult without established credit can be challenging, but it's not impossible. By taking small steps, seeking out resources and support, and being diligent about making on-time payments, young adults can work towards establishing a positive credit history and score. It may take time and effort, but the long-term benefits of having established credit are well worth it.