The Top Two (Not So Secret) Rules for Building Your Credit Score in Your 20s

build credit in college

Chances are, at some point in your life, you’ve received a credit card offer in the mail telling you that you are pre-cleared for the newest, hottest credit card on the market. Most of us will throw it away immediately because we have been told that credit cards are the first step down a path to financial ruin, right?

Not necessarily.

Credit cards are the main avenue to increasing your credit score and, by extension, decreasing the interest rates you will owe when you get a mortgage, auto loan, or personal loan. So why take a risk now with debt just for the possibility of better interest on future debt?

By treating your credit card just like a debit card, you can avoid the risk of paying interest on debt. That means not spending money that isn’t in your bank account. You can start building credit (and get up to 30 days of free financing) by simply replacing all debit card purchases with credit, then paying the credit card balance at the end of the month through a bank account. Be sure not to spend over 25% of your total credit limit, though.

Whether you are just starting to build credit, or have been doing so for years, here are my top two not so secret rules for building credit in your 20s.


Rule #1 Start Building Credit Today

For many people in their 20s, owning a home may seem like it is a lifetime away, so why should you care about your credit score right now?

Because credit is like a fine wine, it only gets better with age.

Length of credit history is one of the key factors in computing a credit score. The FICO credit score model (which is by far the most common), equally weights the length of all open credit items (generally credit cards and all loans). For instance, in the example below, the credit items (which, keep in mind, includes student loans) are simply averaged. This means that any new accounts will significantly decrease a credit score with very few open accounts.

Therefore, the only way to keep this portion of your credit score high is to get started early and keep accounts open. The good news is once you get credit lines started, you just have to sit back and let time do the work for you.

Item Length
Credit Card #1 5 years 11 months
Credit Card #2 3 years 3 months
Student Loan 9 months
Credit Card #3 3 months
Average 2 years, 6 months ([71 mos + 39 + 9 + 3]/4)

Rule #2 Never Miss a Payment

Payment history is the largest single factor affecting credit scores. It makes up 35% of the FICO credit score formula. This comes with good and bad news. On one hand, you can have a perfect score in this category even in the early stages of your credit history.

On the other hand, missing just one payment can badly damage your credit score. On-time payments of 97% or less are deemed “very poor”. This means that even making 49 of 50 payments on time can damage your creditworthiness. This highlights the importance of building credit early. Even if you are making just one payment per month, having a higher denominator (total number of payments) can drastically change your credit score if you happen to miss a payment.

All of this is not to say that a missed payment will ruin you forever, but rather to stress the importance of not missing payments in the early stages of building credit. The same can be said for being sent to collections. A damaging mark like having a bill sent to a collection agency or bankruptcy can cause irreparable damage to your credit score and, by extension, your bank account. Once again, I cannot stress enough the value of treating credit cards like debit cards and paying bills as they come due.


That’s It!

While many people warn against credit cards, they can actually be quite beneficial (and often crucial) for young people hoping to build credit. Using credit cards should be almost identical to a debit card, though it is important to track your credit limit on credit cards. Utilization should ideally be kept under 25% of available credit in any given month, but that is much more short-term goal that will be important when it comes time to look for loans.

Most important is getting started early. Finally, as far as card preference, it is advisable to keep one low-APR card in addition to reward-based credit cards in the event that you do need to just make the minimum payment and carry a balance.

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