Financial independence. It’s what makes any woman the sole proprietor of her life. And one of the best ways to get there is by establishing a solid credit history — and the earlier, the better.
Here’s why: if you wait till 25 to start establishing credit, odds are you’ll be depending on others for a lot of the stepping stones in your life, such as signing an apartment lease or securing car loans or even taking out a business loan.
But a study published in 2015 showed that 10 million of the 26 million “credit invisible” people in the United States are under 25. These young people also account for a disproportionate share of the additional 19 million people with unscored credit records, according to the study.
Naturally, younger people tend to have lower scores, or invisible scores, because they’ve not yet had the chance to build up their credit. And there are other factors at play, too — you’re more likely to be credit invisible if you come from a low-income neighborhood, or if you’re Black or Hispanic (both communities have been historically discriminated against by the financial industry).
The matter becomes more complicated when it comes to young women, who are affected by a gender pay gap as soon as they enter the labor force. Women ages 15 to 24 working full-time, year-round are typically paid 95 cents for every dollar their male counterparts are paid, according to the National Women’s Law Center. The gap continues to expand over the course of a woman’s career, according to various studies.
For all those reasons, it’s smart for young women to take control sooner than later to ensure good financial standing tomorrow. That’s why we talked to credit experts on how to get the ball rolling. Here’s what they said.
Just as with anything else, educating yourself should be your first step. When it comes to credit, this means learning the difference between a credit score and a credit report, and what impacts both.
“People will equate credit scores and credit reports — it’s critical to understand that there are two different things,” says Rod Griffin, the in-house credit advisor at Experian, one of three nationwide credit reporting agencies (the others are Equifax and TransUnion). “A credit report is the record of your financial agreements and how you’re repaying them; a credit score is a tool that’s used by lenders to evaluate that information.”
Your credit report lays out all the information about debt that you owe — whether that’s from credit cards, car loans, mortgages or something similar. For example, if you took out student loans in college, this is where you’ll find how much you owe on them, 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 run by all three credit bureaus.
Your score is impacted by what’s in your report. A good score is usually considered to be 700 and above, Griffin says. Late payments or using too much of your credit can negatively impact your score, whereas 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 available well,” Griffin adds. “The longer you’ve used credit, and done well with it, the better your scores are likely to be.”
Have a Game Plan
Whether you’re trying to establish credit or trying to recover from a bad score, credit cards can be a great asset. But before you apply for a card, have a set game plan for how you intend on repaying your debt. “You should have a plan for how you’ll repay that debt, and that plan should include how you’re going to repay it and when it will be repaid,” Griffin says.
“Credit cards are very convenient,” adds Kimberly Palmer, a personal finance expert at NerdWallet, a popular personal finance app for young people. “And they can make it easy to pay for things while also protecting yourself from fraud, even building up rewards. But if you have debt, it can be dangerous, because credit cards come with a really 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 that I see is that you should only pay 95% of your balanced credit scores,” Griffin says. The 5% you don’t pay off will begin to accrue interest, in turn costing you more.
One way to use credit cards for credit-building is to make small purchases that can be paid off immediately. For example, buying a $20 meal on your credit card and paying it off in full right away will keep your credit usage low, help your credit score, and potentially earn rewards, the experts say. “The only danger is the risk of not paying and then building up debt, that’s what you want to avoid,” Palmer adds. This also keeps your credit card active, given that an inactive card will eventually be excluded from your credit report, Griffin says.
And When You’re Looking For a Credit Card …
Palmer says the average rate on a card is 18%, but because young people tend to be newer to credit, odds are you will get a higher interest rate on your credit card.
The safest option, she says, is to opt for a “secured” credit card. “If you are just starting out, it can be a really good option to start with a secured card, which actually means you put money down and then you’re spending against that money and you can’t actually build up more debt.”
Apps like NerdWallet or Credit Karma will give you personalized suggestions for potential credit cards you could apply for, and for the most part, are free to use. Because there are an overwhelming number of options available, make sure you think about what exactly it is that you need before you apply for a credit card.
Each time you apply for a card or a loan, the bank will run a “hard inquiry” on your credit, which can negatively affect your credit score, Palmer says. The good news is that the effects are temporary, meaning your score will bounce back, but it’s best to think wisely and only apply for what you need. Factors to look for could be low interest rate, no annual fee, and rewards and cashback offers.
Another option for some young people that Griffin suggests is becoming an authorized user on a parent or family members’ account, which would allow for a credit report to be established in your name and comes with less risk.
In Any Case … Avoid the Perils of Credit
Whether it’s a secured card, being an authorized user or simply paying off student loans, make sure you’re making your payments on time. “Late payments will wreck credit scores because it shows you’re not behaving as agreed under terms of that contract,” Griffin says.
A payment late by 30 days or more is the single most damning factor when it comes to your credit being affected. Even if you’re off by a single day, your credit card company could hit you with a late payment, Palmer says, but it usually won’t be reported unless it’s 30 days late.
Beyond late payments, Griffin says, your credit utilization ratio can also be detrimental to your score. That’s the amount of credit you’re currently using, divided by the total amount of credit you have available. Keeping your utilization rate to 30% or lower is your best bet. “Having high balances as compared to credit will drive your score down significantly,” he says.
Most Importantly, Be Patient
One of the quickest ways to give your score a potential nudge is to use credit-building tools such as 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. For more on how they work, and whether it makes sense for you, check out Wirecutter’s review.
Beyond those tools, patience is required in credit scoring.
Building a good credit score takes time, so playing the long game is key. “Being boring and consistent is very sexy to a bank — that consistency is very critical,” says Griffin.
As long as you’re making your payments, your score will eventually start to see improvement. And that can help secure your future financial stability.
A strong credit history is “an empowering tool for young women to achieve their financial goals and to be independent,” says Griffin, a father and grandad. “Without big credit, it’s not impossible, but it’s much harder to be financially successful.”
“If you start building [credit] early, when you’re young, it can be so much easier for you to have access to the financial products that you want,” Palmer adds. “It lets you have more choices.”