How to Build Credit in Your 20s Without Going into Debt

8 MIN. READ

 

Key takeaways:

• Building credit in your 20s is crucial for accessing a wider range of banking products later in life.
• Getting started with a credit card or loan means you might end up in debt if you’re not careful.
• We’re here to share some tips to help you build credit without falling into debt.

Do you have any big plans for the next five years? If you’re in your 20s, these plans can include renting your first apartment, getting your first car, attending college, or perhaps even starting a business.

These milestones are easier to reach if you have a good credit score. However, there is a catch: to build credit, you must use credit cards and loans, which means taking on debt. And if you’re not careful, you can end up with more debt than you can manage.

We’re here to share some simple tips on how to build credit safely, avoid debt, and make some progress toward your financial goals.
 

Ground Rules for Building Credit Without Debt

Managing your credit (and your money in general) doesn’t have to be complicated. Keep a few ground rules in mind at all times, and you’ll avoid most debt-related pitfalls:
 

• A credit card is a payment tool, not extra income. If you can’t pay for something by the credit payment due date, you can’t afford it.
• To build credit, you need two key components: making on-time payments and maintaining a low utilization rate on your credit lines. Always pay at least the statement balance on time or more if you can.
• Instead of using a credit card for impulse buys, charge one or two predictable bills a month. This way, you’ll have monthly credit card payments you can easily budget for.

When starting out with credit management, making regular, on-time payments to a single credit card is better than trying to juggle multiple lines of credit. You can look into branching out and adding another card or loan to your finances once you feel more comfortable.
 

Safe Starter Tools for Building Credit

Choosing the right tools matters when you’re building credit in your 20s. There are lots of credit card offers to choose from, but think about what’s going to be easy to manage while working toward your financial goals.
 

Starter or Student Credit Cards

These credit cards have a low limit and simple application requirements. You can usually get one as soon as you turn 18 and have a job. As long as you keep the balance low and make regular payments, you can request a credit line increase after a few months to boost your credit score.
 

Secured Credit Cards

Secured credit cards are a controlled way to establish or rebuild your credit. You make an initial deposit, and a corresponding credit line is established. After a while, if you manage your card responsibly, you’ll get your deposit back. There is little risk of overspending since your credit limit is tied to your deposit.
 

Credit-Builder Loans

Obtaining your first personal loan is ideal for financing a significant purchase, such as a new laptop for school. Making your loan payments on time and eventually paying off your balance may boost your credit score.
 

Building Better Credit in Your 20s in 5 Steps

Building credit as a young adult doesn’t have to be complicated. These strategies will help you build a credit history and add points to your score over time.

Step 1: Start With a Secured Credit Card or Student Credit Card

It should be relatively easy to get a secured credit card or student credit card once you turn 18. Student credit cards usually have a low credit limit to qualify, and secured cards require you to make a deposit. After that, you get access to a credit line that corresponds to your deposit, and you get your deposit back after a while, as long as your card is in good standing.

You can use your secured or student credit card to cover some everyday purchases and make regular payments each month. Try to pay the balance in full, so you’re not spending money on interest. This will help establish a history of on-time payments, which account for around 35% of your credit score.

For instance, let’s say you spend about $30 a week on gas to drive to work. Swipe your credit card at the pump, and put aside $30 a week as soon as you get your paycheck. At the end of the month, you should have a credit card balance of $120 and enough money put aside to cover it. You can even automate this payment if you’re worried about missing it.

Depending on the credit card you qualified for, you may even earn points on these purchases.
 

Step 2: Take Advantage of Experian Boost

Experian is one of the three main credit-reporting bureaus. With Experian Boost, you can connect a regular checking account to their platform, and the credit bureau will keep track of recurring monthly payments on things like car insurance or some utility bills.

Whether you’re living on your own or helping out your parents with a few bills, it’s a great way to get a few extra points on your credit score.
 

Step 3: Get Added to a Relative’s Credit Card as an Authorized User

Someone in your family or an adult you know well can add you as an authorized user on one of their credit cards. You’ll get your own card tied to their account and can use it to make purchases. However, the primary cardholder (the person who opened the account) is responsible for paying off the balance.

If the account has been open for several years and has a record of on-time payments, becoming an authorized user can help establish a longer credit history and improve your credit score.

Some families also use an authorized-user card as an emergency option when a student is away at college.

Keep in mind that you need a relative or trusted adult willing to add you to their account, so this strategy may not be available to everyone. If you know someone who is willing to add you as an authorized user, make sure the account has a good history of on-time payments.
 

Step 4: Build Credit With a Loan

There is a simple strategy you can use to quickly build credit with a personal loan:
 

• Apply for a personal loan with low interest. Credit unions should have good options.
• Keep the $1,000 in a savings account to earn interest on it.
• Pay off the loan over the next 6 to 12 months with a portion of your paycheck.
• Once the loan is paid off, you’ll have $1,000 in a savings account drawing interest, and your credit report will have a history of on-time payments.

Step 5: Let Things Happen Naturally

Another important part of building credit in your 20s is to diversify your credit mix. This means having different types of credit accounts on your report, such as credit cards, auto loans, personal loans, student loans, and mortgages.

However, you should not open new loans and credit cards just to build credit. Instead, you should let your credit profile grow as your needs change with time.

For instance, you might get your first secured credit card at 18, and find that you need a second credit card a couple of years later. You might apply for student loans when you start college, and get your first car loan after graduating.

The best way to decide which products should be in your credit mix at the moment is to develop your financial literacy with educational resources. Familiarize yourself with different banking products, learn how to compare terms and interest rates, and get advice from your local credit union representatives if you need personalized guidance on banking.
 

Banking With a Credit Union: Does It Help Build Credit?

Getting a credit card or a loan through a credit union can be safer if you’re new to building credit. This is because credit unions operate on a not-for-profit model.

Credit unions are here to help you succeed financially. They’ll deliver genuine advice on how to build credit and recommend the best products for you. On the other hand, a for-profit bank might steer you toward the product that is most profitable for them, regardless of your financial goals. Plus, you may save on banking fees and interest since credit unions can offer more competitive products.

When getting a credit card or loan from a credit union, you can expect:
 

• Transparent terms and no surprise fees.
• An underwriting team that looks at your entire financial situation. It matters when you don’t have a lengthy credit history.
• Access to friendly staff members who can review your statements with you and help you set up payment reminders or autopay.

Build Your Credit With Power Financial Credit Union

Power Financial Credit Union has been around since 1951. We proudly serve the South Florida community, and we’re here to help you build credit with affordable and easy-to-manage products.

If you’re currently in school, we offer a Credit Card for Students with great perks, including capped interest rates, a low APR, and no annual fees. To learn more about this credit card and explore our other options for building credit, please contact us online or visit one of our South Florida branches.
 

FAQ

How often should I use my credit card to build credit?

You should use your credit card for small recurring expenses, like subscriptions or your phone bill to get started. This will build a history of on-time payments, and the balance due will be very manageable and easy to predict.

Is it possible to build credit without carrying a balance?

You can build credit without carrying a balance over on your credit card. The credit reporting bureaus look for on-time payments and a healthy utilization rate for the credit available to you. Paying off your balance in full will not have a negative impact on your credit score.

Which is better for beginners: a secured card or a student card?

A student card can be a good fit if you have some income and can qualify, while a secured card is helpful if you’re just starting or have a very limited history. Both can work well as long as you keep spending low and pay on time.

Do I need to pay my credit card balance in full every month?

Paying your statement balance in full by the due date is the best way to avoid interest charges and prevent credit card debt from growing. If you cannot pay the full balance, always make at least the minimum payment on time and create a plan to pay down the remaining balance.

How long does it take to build credit?

It usually takes a few months of using your credit card regularly before you’ll start seeing reported account activity. Building a strong credit score takes time, and it’s about being consistent with good credit management habits.

Will applying for a credit card hurt my credit score?

Applying for a credit card may result in a hard inquiry, which can cause a small, temporary change to your credit score. Avoid applying for several cards at once, and choose a card you are likely to qualify for based on your income and credit history