When you are in your 20s, life is a balancing act. Rent, utilities, food, student loans, credit card payments, and other obligations all need to be juggled, and usually on minimal income. You might be depending on a roommate or three to get by, and money might not be pouring in smoothly enough to keep all of the bills paid on time. So what about your credit score? Where should it look like when you are in your 20s?
If you’re not planning to buy a house anytime soon, your credit score doesn’t need to be pristine just yet, but you should be on the road to building a solid credit score.
What is your credit rating?
Your credit rating is a score, sometimes called a FICO score depending on how it is calculated, developed based on your financial history. It is a number, typically in the range of 300 to 850, that estimates your ability and willingness to pay your bills on time and meet all of your financial obligations.
If you don’t know what your credit rating is, then you should find out. By law, everyone is entitled to three free credit reports once a year. Monitoring your credit report and credit activity is important — any big financial moves you want to make in the future will be guided by your credit score.
If there is any fraudulent activity made under your name, it will show up on your credit report as well. By monitoring your score, you’ll be in a better position to rectify any problems that come up.
How is my credit score used?
Your credit score is the foundation by which banks and other lenders decide if you are a good credit risk to take on. In combination with your income, it estimates how likely you are to pay your bills on time. Every time you apply for any kind of loan or credit card, the lender will pull your credit score from one of the main credit reporting agencies, and it is important to know that too many inquiries in a short period of time can negatively impact your score.
What should my score be?
The minimum credit score needed to get decent terms on any loan is about 620 or higher. If your credit score is lower than this, there is no need to panic. If your score is 580 or better, you will likely be able to get a car loan, credit card, or other loan when you need it, but be prepared for a high interest rate.
When you’re in your 20s, it’s important to stay on top of paying bills on time — including credit cards, school loans and car payments. Also, paying more than the minimum amount will show lenders you want to establish solid credit and are serious about paying off your debt. While a house may not be on the radar for twenty-somethings, renting an apartment is. Most landlords favor renters with good credit.
How do I improve my credit rating?
If you keep up with paying your bills on time, every time, your score will improve. It may take a couple of years, but bringing up a low score is just a matter of paying bills on time and not taking on more debt than you can afford. Even one late payment can negatively impact your credit score, so being consistent with timely payments is of crucial importance if you’ are trying to build your credit rating.
Once you are ready to settle down and buy a home, you’ll want the best credit rating possible to get great mortgage terms, so work on laying that foundation now.