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Credit is a foundational pillar of financial well-being — and most young people realize that. According to research recently released by Experian, 79% of millennials and Gen Zers are actively trying to increase their credit score now rather than putting it off for later. At the same time, most of these consumers (52%) don’t know how to start building credit.
Establishing a strong credit history isn’t always easy, but the basics are straightforward. CNBC Select breaks down the steps young consumers can take to begin their credit-building journey and recommends products that can help them along the way.
A credit card is arguably one of the most convenient and effective tools for building credit. It offers more benefits and protections than a debit card, and you can use it for most routine expenses. And with each swipe of the card, you’ll create a record of activities that allows the major credit bureaus to generate a report on your creditworthiness for banks and lenders.
While many of the best credit cards require good credit (or a FICO® score of 670 or higher), you have plenty of options even if your credit is far from ideal or you’re new to it. For instance, secured credit cards provide a low-risk way for borrowers to use a card to raise their credit scores. Some of them even earn rewards, which typically you only find with regular unsecured cards.
For example, the Discover it® Secured Credit Card, CNBC Select’s pick for the best overall secured card, offers 2% cash back at gas stations and restaurants on up to $1,000 in combined purchases each quarter, then 1%. Additionally, you can earn unlimited 1% cash back on all other purchases automatically.
Earn 2% cash back at Gas Stations and Restaurants on up to $1,000 in combined purchases each quarter. Plus, earn unlimited 1% cash back on all other purchases – automatically.
Discover will match all the cash back you’ve earned at the end of your first year
Balance transfer fee
3% intro balance transfer fee, up to 5% fee on future balance transfers (see terms)*
Foreign transaction fee
*See rates and fees, terms apply.
Whichever credit card you pick, make sure to follow these simple guidelines to make sure the card will help your credit:
- Always pay your bills on time. Payment history is the most influential credit score factor. To avoid any late payments, you can set up autopay, which you can usually do in your credit card app.
- Stay away from your credit limit. Credit utilization (or how much of your available credit you’re using) is the second most important credit factor. You want to keep your credit utilization rate under 30% to make sure you don’t hurt your credit. For instance, if your card’s credit limit is $1,000, you shouldn’t carry a balance of more than $300.
- Request a credit limit increase. After you’ve used your card responsibly for several months, you can get in touch with your card issuer and ask to increase your credit limit. This will allow you to keep your credit utilization low more easily — and give you more borrowing power.
Can you build credit without a credit card?
If you’re not comfortable with a credit card, there are other tools you can use to build your credit without one. Consider a credit-builder loan which allows you to deposit the loan amount into a savings account and get the money back once the loan is fully repaid. Further, any installment loan that you already have can help you build credit. For example, if you’re paying off an auto loan or student loan, it can benefit your credit.
Using credit products, such as credit cards and loans, isn’t the only way you can build your credit. You can sign up for certain services that will make sure bill payments usually ignored by the credit bureaus will count towards your score. Namely, Experian Boost™ allows you to add on-time utility, cell phone, streaming service and rent bill payments to your Experian credit report free of charge.
Average credit score increase
13 points, though results vary
Credit report affected
Credit scoring model used
Results will vary. See website for details.
Note that Experian Boost only affects your FICO Score with Experian. Your potential lenders may use a different scoring model and pull credit from Equifax or TransUnion. Still, it’s an excellent opportunity to improve your credit standing with one of the three major credit bureaus.
We’ve already talked about practicing good credit card habits — but if you have or are planning to take on other types of debt, it’s essential to consistently treat them with the same care.
From student loans to car loans to personal loans and mortgages, each credit line you take on shapes your credit profile. Paying on time is crucial, so make a point to budget for each of your debt obligations. If a late payment shows up on your credit reports, it will stay there for seven years, negatively affecting your scores. If you ever think you’re at risk of being late on your loan payments, get in touch with your lenders to discuss your options as soon as you can.
Only apply for new credit when you need it and it fits into your budget. For example, you might be approved for an expensive car or mortgage loan, but it doesn’t mean it’s a good idea to get one. Always make sure you can comfortably afford to pay off a loan before taking one on.
Further, as your credit improves, you’ll have access to better credit cards with more perks and rewards. Make sure the cards you have complement each other and match your spending habits. Managing multiple credit card bills and annual fees can challenge even the most conscientious borrower so make sure you’re prepared to keep on top of it all.
It can take time to build your credit, and a credit monitoring service can help you avoid any surprises or errors from slowing you down on your journey to a good score.
CNBC Select picked CreditWise® from Capital One as the best free credit monitoring service. It provides a range of useful features, such as the credit score simulator and dark web monitoring, and offers access to your VantageScore from TransUnion. The service also tracks changes on your TransUnion or Experian reports. CreditWise is open to anyone — not just Capital One customers.
Credit bureaus monitored
Credit scoring model used
Dark web scan
Another excellent choice is Experian free credit monitoring. You’ll get monthly updates on your FICO score and Experian credit report in addition to access to features like online disputes and real-time alerts about new accounts or inquiries.
Speaking of disputes, make sure all the information you’re seeing on your credit is correct. If something doesn’t look right — for example, you’re seeing accounts you haven’t opened or addresses that don’t belong to you — file a dispute. Stay vigilant because errors on your credit reports might be a sign of identity theft.
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Building credit is simple, but that doesn’t mean it’s easy. If you’re focused on improving your credit, use credit cards and loans to your advantage by always paying on time and being a responsible borrower. Achieving a high credit score may take time and patience, but in return, you’ll be able to get better rates and terms on new financial products, saving money in the long run.
For rates and fees of the Discover it® Secured Credit Card, click here.
*Results may vary. Some may not see improved scores or approval odds. Not all lenders use Experian credit files, and not all lenders use scores impacted by Experian Boost.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.