March 14th, 2013
Build Your Credit Early or Pay For It (Literally) in Your 20’s
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The most savvy consumers know that building your credit throughout your teenage and college years is crucial when it comes to loan interest rates and approvals in your 20’s and 30’s. The majority of us, however, have no clue how important it is to build your credit early. When I graduated college and went looking for a car loan, I was firmly in the clueless majority and was about to join those consumers who had learned the importance of building credit early the hard way.
Here’s what happened…
I got my first credit card when I was 19. However, I rarely used it, with the exception of the time I swiped two music festival tickets on it – two tickets I really couldn’t afford, by the way – and ended up paying them off over the course of the next year or so. Other than that one lavish purchase, I considered myself to be a pretty credit-worthy consumer; I rarely used my card, I made on-time payments every month, and I racked up next to no debt.
Upon graduating college, my credit score was in the good-to-excellent range, and I had (finally) paid off those concert tickets. So after moving to California and realizing pretty quickly that I was going to need a vehicle to get around, I was confident that I’d be handed a loan for a used car in no time.
You’re not going to believe this, but that isn’t how it worked out.
The first car I tried to buy was a Toyota Corolla that was selling for $7,000. I had $1,500 to put down and a full-time job (albeit with an entry level income). And yet I couldn’t get financing because of my lack of credit history. I ended up walking off the lot disappointed. Emphasis on “walking”.
I then decided on a new strategy. I picked out a Ford Focus online, made my way to the dealership, gave it a test drive, and was ready to buy. The dealer was able to find me financing (or so I was lead to believe), and I happily drove my new car off the lot.
Two days later, I received a phone call from the bank I was told had lent the money to me. They told me I was denied the loan, citing “credit history” yet again. So now I had a car sitting in my parking lot that I could not afford and a down payment that had already been cashed. It was time to call some banks.
After a few disappointments with big banks, I walked into a local credit union. Credit unions are awesome. Every good thing you’ve ever heard about them is probably true, and on my fourth loan attempt, I was finally able to secure a three-year loan with a decent interest rate and low monthly payments. When I asked the personal banker why it was so hard for me to get approved, she confirmed what I had heard a handful of times: “limited credit history”. Got it.
So please learn from my mistakes and avoid future fiascos by building your credit early. Here are some tips for doing so:
- Dust off that credit card and start using it….
…But make sure you’re paying it on time and in full each month. Your credit score and health will improve significantly over time if you make one or two payments on your credit card each month. If you don’t carry a balance (which is a good thing), that means making purchases every month and paying them back on time.
Racking up a solid payment history is the most important factor in improving your credit history.
- Open up a new credit card account.
Another easy way to improve your credit history is to open up a new credit card account. Having multiple credit accounts looks good to lenders because it shows you can maintain more than one account responsibly. It also helps to diversify your credit. If you are able to maintain and pay off two credit card accounts, plus another account (like student loans), you should be in a good position to get approved for a loan.
- Ask your current credit card company to extend your credit line.
No, not because you plan on racking up a ton of credit card debt. Extending your credit line improves your credit utilization ratio – the amounts you owe (your debt) relative to your total available credit line.
This actually won’t improve your credit history significantly, but it will improve your credit health… and anything you can do to improve your chances of a low interest rate is worthwhile.
Moral of the Story: If you have a solid credit score, keep doing what you’re doing – only better. Accelerate your payment history, diversify your credit profile with a new credit card, and extend your available credit lines early to enjoy the fruits of a solid credit history in your 20’s.
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