Many things are important when it comes to finances. From paying off debt to saving for the future, there are many facets to being financially stable. This can make it difficult to know where to start, especially if the basics of financial literacy weren't included in your formal education.
This can be a particular challenge for Millennials who graduated with student loan debt or simply don't know how to build a good financial base. That being said, the top financial tip for Millennials may be a surprising one – establishing good credit. Here's why building good credit may be one of the best things to pursue as a Millennial just starting out.
Having Good Credit Impacts Many Things
Our society is built on credit. Some don't like that, but the fact is we're a culture built on credit. If you want to buy a home, rent an apartment, land a job or get a loan to buy a car, good credit is important to have. As such, following are some of the individuals who legally can look at your credit report:
- Prospective employers
- Car insurers
- Potential landlords
- Student loan lenders
- Utility companies
In short, the list of who can view your credit report seems longer than that of those who can't view your report. This impacts you in one specific way. It can impact the amount you pay or are charged in many situations. Right or not, it can impact getting the job you want.
In terms of your financial livelihood, having good credit can save you thousands of dollars now and over the course of your life. When your credit is healthy, you can enjoy lower rate offers on everything from student loans to car loans to mortgages.
Tips to Follow to Improve Your Credit
You may be asking yourself how you can build good credit when you're just starting out. That's a fair question to ask. The first thing to know is what goes on your credit report. According to the Consumer Finance Protection Bureau, there are several things included on your credit report: personal information like social security number and date of birth, credit accounts, accounts that have gone into collections and inquiries.
The more important point is knowing how your credit score is calculated. Your FICO Score, the most common credit score used, is made up of the following:
- 35 percent - Payment history
- 30 percent - Amounts currently owed
- 15 percent - Length of credit history
- 10 percent - New credit
- 10 percent - Credit mix
It can be a challenge to establish good credit when you're just starting, but with some effort it can be accomplished. You can begin to build good credit through some of the following methods:
- Pay your bills in full, every month, on time
- Keep your older accounts open
- Limit the number of new credit accounts you open (avoid store credit cards as they often report your limit as the amount you have on the card)
- Get added as an authorized user on your parents credit card (this will benefit you if they pay off their card every month)
There are other ways to establish good credit, though these are the best ways to do so. Simply being wise will win out in most circumstances and help you save money when it comes time to need credit.
You Don't Have to Be Perfect
It's easy to think you need to have perfect credit. In many instances you don't, you simply need to have good credit – which is anything over a score of 720 up to 850. We all make mistakes and we all have to start somewhere when it comes to finances.
The key to remember is that building credit takes time. You won't get good credit overnight, but you can strengthen it through a few simple practices. Don't allow long term nature of the challenge deter you; rather, use it to put yourself in the best situation possible to save money on everything from daily needs to longer term purchases, like a house or car.
The Bottom Line
It can be a challenge to know what to focus on when you're just beginning. Establishing good credit from the start will not only help you in the present but it can save you significant money throughout your life.