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5 credit score secrets of the young and FICO-savvy

How some 20-somethings achieved high scores, low rates

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If you're under 30 and want to buy a new car, qualify for a mortgage or apply for a low APR credit card, you're going to need a high credit score, which can be a challenge for young adults.

5 credit score secrets of the young and FICO-savvy
5 credit score secrets for 20-somethings

We found young people with high credit scores, and the traits they had in common. They tended to do these things:

1. They started to build credit early.
2. They paid for nearly everything with plastic.
3. They applied for credit judiciously.
4. They kept balances low, credit limits high.
5. They monitored their credit files.

Today's 20-somethings face a tough economy and a stiff lending environment that looks down on applicants with extra-short credit histories -- and even shorter resumes. It's more important than ever, experts say, to break through those age-related obstacles and build a solid financial foundation early.

"The fact is that the young people are going to face a completely different world than we faced," says Anamaria Lusardi, director of the Financial Literacy Center at Rand Corp. "We are moving into a world of individual responsibility where people are going to be in charge of financial decisions that unfortunately have become very complex. Their financial security depends on them."   

That's why financial experts say you should start planning now rather than later.

If you're not sure it's even possible to one day ditch your landlord, junk that clunker of a car and qualify for a credit card that you don't have to secure in advance, don't sweat. Here's how some credit-savvy 20-somethings defied the credit score odds and slowly built their credit histories to FICO greatness.

1. They started building a credit file early.
Scott Nguyen of Irvine, Calif., knew that he wanted to buy a house and achieve financial independence by the time he graduated college, so he began deliberately building his credit file as soon as possible. "I read somewhere that in America, to make it you had to be in debt [and] the earlier you start building your credit, the better," says Nguyen, 23.

Nguyen applied for his first credit card on his 18th birthday and then looked for other small, easy-to-qualify-for loans that that he could use to build his payment history, such as a small computer loan for students and a secured personal loan. Once he established a history of timely payments, Nguyen began looking at additional credit card offers. "I knew I didn't qualify for the really good high-rewards cards, so I applied for credit cards that were geared toward students with limited history," says Nguyen.

By the time he graduated, Nguyen's credit file included four credit cards, a secured personal loan and a car loan, all of which he paid on time so that he could prove to lenders that he could be trusted with an even larger loan, such as a mortgage.

My credit is something that I take a lot of pride in now. It made me feel good that the banker was surprised at my credit score, and so I got the best rates at a young age.

-- Scott Nguyen
Irving, Calif.

Nguyen's strategy worked. In less than five years, he built his credit score high enough to qualify for a low-rate mortgage at age 22. "My credit is something that I take a lot of pride in now," he says. "It made me feel good that the banker was surprised at my credit score, and so I got the best rates at a young age."

Experts say that Nguyen's slow but steady loan building strategy was a smart one. "The fact of the matter is that we live in a credit-driven society. We're all going to need a thick credit file," says Gail Cunningham, vice president of public relations at the National Foundation for Credit Counseling.

That said, the Credit CARD Act of 2009 makes it a lot harder for students under the age of 21 to obtain a credit card, so those  eager to start building their credit histories early need to get a bit more creative.

For example, if you're under 21, you will have to show proof of income to qualify for a credit card and prove to the lender that you can afford your monthly payments. Or you will need to find someone 21 or over with sufficient income who will agree to co-sign your card.

If that's not feasible, don't give up hope, says Cunningham. You can also piggyback as an authorized user on one of your parent's credit cards. You won't be responsible for the card payments, but your credit activity will be reported to the rating agencies.   

DJ Wetzel, 25, of Greenville, S.C., adds that any student loans you take out now or in the future will also help pump up your credit file and improve your score -- as long as you pay your loans on time after you graduate. Now a financial aid officer, Wetzel often advises students to look at their loans as a chance "to build your credit and establish a foundation."

2. They paid for nearly everything with plastic.
Leena Chitnis of Syracuse, N.Y., began building her "sterling" credit history at an early age by paying for nearly every purchase with a credit card -- and then paying those purchases off each month.

Having too many credit cards will hurt your credit. When you have too many credit lines out there, then that can start looking bad. Even when you never use your credit, it can still look bad.

-- Danae Castellaw
Boise, Idaho

"I don't use cash," says Chitnis. In fact, she says, "I wish my landlords would accept credit card payments." However, Chitnis adds, "I don't pick up loans I know I can't pay."

Her strategy has paid off. Chitnis is currently in graduate school, but she's built up a solid enough credit history to qualify for rewards cards. "I did my research and got credit cards that gave something back to me," says Chitnis. She's since used the rewards cards to accumulate enough airline points "to go to India and back."  

Experts say that using your credit card frequently -- rather than only for emergencies -- is a smart thing to do if you're disciplined. "If you are someone who's very organized, budgets well and keeps really good financial records, you're really losing out if you're not using your credit card," says Andrew Schrage, a 24-year-old editor at the personal finance blog Money Crashers.

"There's not a huge menu of items that one can implement to improve their credit score at a young age," adds Schrage. However, he says, "the best and most easily implementable strategy is to hone in on the credit cards and use that to build your credit history."

But, Cunningham adds, if you're going to rely on plastic for daily purchases, make sure you have enough self-discipline to only charge what you can pay off. "Some people choose to live off of credit, and that's just fine," says Cunningham. "But it starts with knowing yourself. If more plastic is going to lead to more temptation, then you would want to limit your activity."

3. They applied for credit judiciously.
Danae Castellaw, 24, of Boise, Idaho, began building her credit score as a high school senior by taking out a store credit card with a low limit. She then applied for an adult credit card while a junior in college and later opened another store card while shopping. However, Castellaw says she made sure not to apply for too many credit cards too soon.

"Having too many credit cards will hurt your credit," says Castellaw, because it makes you more of a credit risk. "When you have too many credit lines out there, then that can start looking bad. Even when you never use your credit, it can still look bad."

Castellaw says that she would see her friends sign up for multiple store credit cards in order to get discounts on their purchases, but she resisted following their example and risking her credit score. "You have to say no when you're in the mall," says Castellaw. "It could be tempting, but it's not worth it."

Closing an unwanted credit card account can also ding your credit score, says Castellaw. "I wanted to close one of my store credit cards, but my dad was like, 'No, I wouldn't do that. That can reflect negatively on your report.'"

Nguyen agrees. He recommends that you instead only open credit cards that you know you'll want to keep. "Don't go around and just apply for every credit card you see," says Nguyen. "Make sure the one you get is one you'll stick to for life. You want that credit history to remain with you."

And if you do get turned down, "Don't keep applying over and over because that sends a signal to the lender that you're desperate for credit," adds Cunningham. Plus, every time you apply, the lender checks your credit. That checking is called a hard inquiry, which temporarily dings your score. (A soft inquiry, such as when you check your own credit report, has no impact on your credit.) That's why, when applying for credit, you need to space out those inquiries over a span of several months.

4. They kept their balances low -- and credit limits high.
Nguyen says he deliberately spread his balances out and kept them low so that he didn't inadvertently hurt his credit score by increasing his credit utilization rate. He never runs up a balance more than 30 percent to 40 percent of the total amount of his credit limit. Maintaining a low utilization rate is an important component to a high credit score.

Nguyen says he also asked for credit limit increases in order to help boost his score. "Every nine months, I requested to increase the limit on my credit card," he says. "I would ask them, 'Would it be possible to increase it without running a credit check?' and if they were able to approve it, I would take that amount."

Nguyen's strategy allowed him to gradually increase his credit limit -- and improve his credit utilization - without adding unnecessary credit history inquiries to his credit report. Wetzel followed a similar strategy after he and his wife realized that canceling another card would affect their credit utilization. "We asked for a credit line increase with [our] other credit card in order to compensate for the canceled card," says Wetzel.

Blogger Schrage says that asking for a credit limit increase is easy and, if approved, is a sure way to boost your score "because it will effectively reduce the amount of your credit limit that you're using."        

"Call up the credit card company and just say, 'Hey, I'd like a credit limit increase,'" says Schrage. However, he adds, "You don't want to request too much," because then you may not be approved.

5. They monitored their credit files.
Mike Canahuati, 30, of Houston, was shocked when he tried to rent an apartment in college and was turned down because of poor credit. When he looked into why he had a low score, he found out that his mother's poor credit history had negatively affected his.

"My mom, before she passed away, went on a little spending spree -- and I didn't know this, but I was an authorized user on the account. She didn't think that it would affect me or my sister's credit." But it did.

"I wrote a letter to all of the major credit reporting agencies asking them to please remove me," says Canahuati. "That was not me, that was my mother's." Canahuati successfully had his mother's cards cleared from his credit history. Eventually, Canahuati's credit score slowly "started to rise to a more accurate figure" and is now high enough to qualify for exceptionally low rates on two mortgages and a car loan.

"Sometimes you don't actually know what's reported to the bureaus" until you see your credit report, says accountant Tiffany Powell of Surprise, Ariz. Powell had a similar shock recently. "My company card ended up on my credit report and the entire company's credit ended up on my credit report. I know for sure that was paid late every month. I had to call all three credit bureaus and American Express to get it taken away from my credit."  

Powell recommends young adults check their credit report regularly for any errors or discrepancies. "Legally, you're allowed to get an annual copy of your credit report from all three bureaus," for free from AnnualCreditReport.com, she says. However, "You won't actually get a score unless you pay for it."

She also notes that it's good to read through your credit report carefully so you know where you stand financially.

Howard Dvorkin, a certified public accountant and founder of Consolidated Credit Services, adds that it's also important to check your credit files to make sure that there isn't any suspicious activity on your accounts. "Younger people are not as concerned as the general public about identity theft because it's never happened," says Dvorkin. "They may not even know what it is until it's happened to them and then it's a problem." 

That's why, Dvorkin insists, "people need to check their credit reports at least annually. You don't want any surprises."

See related: Do your homework when shopping for your first credit card, 4 reasons you should get a department store credit card, How credit card reform impacts young adults under 21, 10 credit commandments for young professionals

Published: August 9, 2011


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