Millennial Money: Now is the time to build your credit

Sooner than you may realize, your credit score will start to matter.

A solid credit score can be the difference between qualifying for an apartment or a low-interest car loan or missing out. So to have credit ready when you need it, the time to start building a good and lengthy credit history is now.

There’s more than one way to build credit, and it could be as simple as reporting your ongoing bill payments to the major credit bureaus. But keep in mind: Building credit takes diligence, particularly since missing payments can hurt your score for years to come.

WHAT IS CREDIT AND WHY DOES IT MATTER?

Your credit score is a number that typically ranges between 300 and 850 and is calculated based on how reliably you’ve paid past debts, such as credit card bills. Lenders use your credit score to predict how likely you will repay debt.

Your credit score helps determine the loans you can receive, the interest you’ll be charged, the credit cards you can qualify for and the properties you can rent. An employer can even check your credit history. Having a good credit score can save you money later on, mainly through lower interest rates when you secure a loan.

If you’re starting with no credit history, you aren’t alone. In the U.S., nearly 40% of people between the ages of 20 and 24 have little to no credit history to generate a score, according to the Consumer Financial Protection Bureau. Unfortunately, the same is true for roughly 20% of the population.

Building your credit might seem overwhelming if you haven’t thought about it before, but there are many strategies to employ, even if you’re just beginning. Start by establishing good habits with managing debt, such as not taking on more debt than you can afford, says Brittany Mollica, a certified financial planner based in Chapel Hill, North Carolina. Missing payments will damage your score and can become a burden when you need to borrow money in the future.

“Getting in good habits of always paying your bills is really important,” Mollica says. “You don’t want to have to be climbing out of a hole of all sorts of credit card debt that you’ve piled up, especially starting out early on.”

CREDIT CARDS –– AND ALTERNATIVE CARDS

Credit cards can be a great tool to establish credit, but they can also damage your score if you take on more debt than you can handle.

If a parent or another trusted person in your life has a high credit limit and a long history of making timely payments, you could become an authorized user on their account and benefit from their good credit. This is one of the easiest ways to lengthen your credit history, says Blaine Thiederman, a certified financial planner in Arvada, Colorado.

Becoming an authorized user will also impact your credit utilization rate, or the amount of money you owe to lenders divided by the total credit available to you, which can help your credit score.

If you have your own income , you can apply for a credit card when you’re 18 years old; otherwise, you have to wait until you are 21. A secured credit card is typically the best credit card to start with. A cash deposit backs these cards, and since the credit card company can take that deposit if you miss payments, people with short or poor credit histories can qualify.

The deposit you have to make for a secured credit card could be a burden, and if that’s the case, an alternative card might be better for you. These cards use income and bank account information to determine your creditworthiness rather than your credit score.

MONTHLY BILLS

If you live independently, payments for rent, utilities and phone bills can all be reported to credit bureaus. So paying those bills can build your credit if they’re on time and you have them reported.

Unlike credit card payments, these payments aren’t reported automatically and can require a third-party service, such as Experian Boost or UltraFICO, to make the credit bureaus aware of your payments.

Remember, these services sometimes require a fee and reporting your bill payments may not always impact your credit score; instead, they may just appear on your credit report.

LOANS

Making regular payments on loans can also help you build your credit. And even if you don’t have any credit history, some loans are available.

Credit-builder loans rely on income rather than credit for approval. If you’re approved, the loan sits in a bank account and becomes available once you pay it off. Your monthly payments are reported to the major credit bureaus.

Student loans are another loan you can use to build your credit when you’re just starting. Federal student loans don’t require credit to qualify, while most private student loans do . Paying off your loans will help you grow your credit history, and you can get started while you’re still in school by making interest-only payments.

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This column was provided to The Associated Press by the personal finance website NerdWallet. Colin Beresford is a writer at NerdWallet. Email: cberesford@nerdwallet.com. Twitter: @Colin_beresford.

RELATED LINKS:

Data Point: Credit Invisibles https://files.consumerfinance.gov/f/201505_cfpb_data-point-credit-invisibles.pdf

NerdWallet: Does Paying Bills Build Your Credit? https://bit.ly/nerdwallet-will-paying-bills-help-build-credit

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