How and why young women can create credit from scratch

Financial independence. This is what makes any woman the sole owner of her life. And one of the best ways to do this is to build a solid credit history – and the sooner the better.

Here’s why: If you wait up to 25 years to start building credit, there’s a good chance you will be dependent on others for many milestones in your life, like signing an apartment lease, leasing obtaining a car loan or even taking out a business loan. .

But a study published in 2015 showed that 10 million of the 26 million “invisible credit” people in the United States are under the age of 25. These young people also represent a disproportionate share of the 19 million additional people with unrated credit records, according to the study.

Naturally, younger people tend to have lower scores, or invisible scores, because they haven’t had a chance to build up their credit yet. And there are other factors at play as well – you’re more likely to be invisible when it comes to credit if you’re from a low-income neighborhood, or if you’re black or Hispanic (both communities have historically been discriminated against. by the financial industry).

The issue becomes more complicated when it comes to young women, who are affected by a gender pay gap as soon as they enter the labor market. According to the National Women’s Law Center, women ages 15 to 24 working full time, full year are typically paid 95 cents for every dollar their male counterparts are paid. The gap continues to widen over the course of a woman’s career, according to various studies.

For all these reasons, it makes sense for young women to take control as early as possible in order to ensure a healthy financial situation tomorrow. That’s why we spoke with credit experts to find out how to get things done. Here is what they said.

Inquire

As with anything else, educating yourself should be your first step. When it comes to credit, that means learning the difference between a credit score and a credit report, and what impacts both.

“People will take credit scores and credit reports – it’s critical to understand that there are two different things,” says Rod Griffin, internal credit counselor at Experian, one of the three rating agencies. nationwide credit (the others are Equifax and TransUnion). “A credit report is the record of your financial agreements and how you repay them; a credit score is a tool used by lenders to assess this information.

Your credit report shows all the information about the debts you owe, whether it’s credit cards, car loans, mortgages, or something similar. For example, if you took out student loans at university, this is where you will find out how much you owe on those loans, what the principal balance was, and where your current balance is. You can access your credit report for free once a year through annualcreditreport.com, which is maintained by all three credit bureaus.

Your score is influenced by the content of your report. A good score is generally considered to be 700 and above, Griffin says. Late payments or overuse of your credit can negatively impact your score, while being consistent and making payments on time can help boost your score.

“Having good credit scores isn’t about having a certain number of credit cards or a certain level of debt,” [it] is about managing the credit you have, ”adds Griffin. “The longer you have used credit and the better you use it, the better your scores will be.”

Have a game plan

Whether you’re trying to build credit or recover from a bad credit score, credit cards can be a valuable asset. But before you apply for a card, have a specific game plan for how you plan to pay off your debt. “You should have a plan for how you’re going to pay off that debt, and that plan should include how you’re going to pay it off and when it will be paid off,” Griffin says.

“Credit cards are very convenient,” adds Kimberly Palmer, personal finance expert at NerdWallet, a popular personal finance app for young people. “And they can make it easier to pay for things while protecting you from fraud and even racking up rewards. But if you are in debt, it can be dangerous because credit cards have a very high interest rate.

When it comes to credit cards, keeping your balances low and paying them off in full become the two most important factors. “One of the common myths I see is that you should only pay 95% of your balanced credit scores,” Griffin says. The 5% you don’t pay will start accruing interest, which will cost you more.

One way to use credit cards to build credit is to make small purchases that can be paid off immediately. For example, buying a $ 20 meal on your credit card and paying for it in full immediately will reduce your credit usage, improve your credit score, and potentially earn rewards, experts say. “The only danger is the risk of not paying and then going into debt, that’s what you want to avoid,” Palmer adds. It also keeps your credit card active, since an inactive card will eventually be excluded from your credit report, Griffin says.

And when you are looking for a credit card …

Palmer says the average rate on a card is 18%, but since young people tend to be newer to credit, there’s a good chance you’ll get a higher interest rate on your credit card.

The safest option, she says, is to go with a “secure” credit card. “If you are just starting out, it can be a really good option to start with a secure card, which actually means you put money in and then spend it against that money and you can’t actually get into more debt.”

Apps like NerdWallet or Credit Karma will give you personalized suggestions for potential credit cards you might apply, and for the most part, they’re free. Because there are an overwhelming number of options available, be sure to think about what exactly you need before applying for a credit card.

Every time you apply for a card or loan, the bank will do a “full investigation” of your credit, which can negatively affect your credit score, Palmer explains. The good news is that the effects are temporary which means your score will bounce back, but it’s best to think carefully and only apply for what you need. Factors to look for can be a low interest rate, no annual fee, and reward and cash back offers.

Another option for some young people suggested by Griffin is to become an authorized user on a parent or family member’s account, which would allow a credit report to be established in your name and be less risky.

In any case… Avoid the perils of credit

Whether it’s a secured card, being an authorized user, or just paying off student loans, make sure you make your payments on time. “Late payments will ruin credit scores because it shows that you are not behaving as agreed under this contract,” Griffin says.

A late payment of 30 days or more is the most overwhelming factor when it comes to affecting your credit. Even if you’re on a single day’s leave, your credit card company might charge you with late payment, Palmer says, but this usually won’t be reported unless there are 30 days of overdue. delay.

Beyond late payments, Griffin says, your credit usage rate can also hurt your score. This is the amount of credit you are currently using divided by the total amount of credit you have. Keeping your utilization rate at 30% or less is your best bet. “Having high credit balances will drastically reduce your score,” he says.

Above all, be patient

One of the fastest ways to potentially boost your score is to use credit building tools like Experian Boost, TransUnion’s eCredable Lift, and FICO’s UltraFICO Score. In general, the tools help demonstrate your creditworthiness by adding non-traditional items like utility payments or even your Netflix payment to your report. To learn more about how they work and if that makes sense to you, check out Wirecutter’s review.

Beyond these tools, patience is required in credit scoring.

Building a good credit rating takes time, so it’s essential to play for the long haul. “Being boring and consistent is very sexy for a bank – that consistency is very critical,” Griffin explains.

As long as you make your payments, your score will improve eventually. And it can help you secure your future financial stability.

A strong credit history is “a tool for young women to achieve their financial goals and be independent,” says Griffin, father and grandfather. “Without great credit it’s not impossible, but it’s much more difficult to be financially successful.”

“If you start to build [credit] early on, when you’re young, it can be so much easier for you to access the financial products you want, ”Palmer adds. “It allows you to have more choices.”