How to Start Building Credit in Your 20s
Your 20s, or even late teens, are the perfect time to lay the foundation for a strong financial future. Even if you already have credit cards, student loans, a car payment, or an apartment lease, you may still feel uncertain about how credit works and what impact your credit score can have on your future. In fact, many young adults feel the same way!
To help the young adults in our community and beyond, we put together this guide to break down practical and actionable steps to establish a strong credit foundation.
Why Building Credit Matters
Your credit score is a three-digit number that lenders use to evaluate how responsible and trustworthy you are in managing borrowed money. Having a better score can mean better interest rates and easier loan approvals, and can even influence rental applications. Down the road, it greatly affects mortgage rates, auto loans, and even job applications.
What can be difficult for a lot of people who are just starting out financially is that the length of credit history accounts for 15% of your score. That’s why starting sooner rather than later can be incredibly advantageous.
Credit 101: What Is Credit?
Before we get into strategies, it’s important for any young adult to understand what affects their credit score. First things first, there are three major credit bureaus: Equifax, Experian, and TransUnion. They track your credit report based on five factors.
Payment history (35%): Are you paying bills on time? This is the biggest detail.
Credit utilization ratio (30%): How much credit are you using compared to your total credit limit?
Length of credit history (15%): How long have your accounts been open?
Credit mix (10%): Do you have different types of credit (credit cards, auto loans, student loans, etc.)?
New credit (10%): Have you opened new accounts recently?
Ways to Start Building Credit in Your 20s
Open a Credit Card
A credit card is the basis for building credit and improving your rating. When you start to browse credit card options, look for cards that have lower interest rates on balances and low (or no) annual fees.
Because you’re just starting out, though, you may find yourself unable to get approved for a card. If that’s the case, try obtaining a secured credit card. With these cards, you make an initial security deposit (usually around $200–$500), which then matches your credit limit. If you use your card responsibly for six to 12 months and you don’t have any late penalties, your card issuer may upgrade you to an unsecured credit card and return your deposit.
Become an Authorized User
Not ready for your own credit card yet? Do you have a parent or family member with a good credit score? They can have you added as an “authorized user” on their credit card. As an authorized user, their credit utilization can impact your credit report, giving you a head start in boosting your score.
Consider a Credit-Builder Loan
These loans work differently than regular ones. Instead of getting money upfront, the lender holds it in a savings account while you make monthly payments. Once you've paid it off, you get the money back—plus any interest earned.
It might sound backwards, but it's brilliant for building credit. Plus, you're forced to save money at the same time.
Report Your Rent and Utility Payments
If you’re already renting an apartment, you can get credit for that. Usually, rent and utility payments don’t show up on your credit report. But Experian has services through which you can report your rent, cell phone, internet, utility, and streaming bills. If you consistently pay them on time, they can help boost your score.
Pay Your Student Loans on Time
If you have student loans, they can help build credit—but only if you make on-time payments once repayment begins. Payment history is the most important factor in your credit score, so set up automatic payments to ensure you never miss a due date. Many lenders offer interest rate reductions for enrolling in autopay, which helps with debt reduction while protecting your credit.
Strategies for Boosting Your Credit Score as a Young Adult
Boosting your credit score isn’t only about opening new lines of credit. What’s more important is managing your accounts responsibly.
Never miss a payment: Set up automatic payments for at least the minimum amount due. Late payments can stay on your credit report for years and can significantly damage your score.
Keep your credit utilization low: Try to use less than 30% of your available credit. For example, if you have a $1,000 limit, keep your balance under $300.
Pay more than the minimum: While paying the minimum amount due keeps you out of immediate trouble, you’ll rack up interest charges that make everything more expensive. Whenever possible, pay your full balance after getting your statement.
Avoid opening multiple accounts at once: Every time you apply for credit, it triggers a hard inquiry that can “ding” your score. Try to space out applications and only apply for credit that you really need.
Mistakes That Can Hurt Your Credit Score
Borrowing money to pay off debt: This creates a dangerous cycle—focus on debt reduction through budgeting.
Carrying high balances: High credit utilization hurts your score and costs you in interest charges.
Missing payments: Even one late payment significantly impacts your score.
Believing credit myths: Do not believe that carrying a balance improves your score (it doesn't).
Ignoring your credit report: Monitor regularly for errors or fraudulent activity.
Tracking Your Credit Progress
You should be checking your credit score regularly. Many banks and credit unions offer free credit monitoring, so you might as well take advantage of it and review your full credit report at least once a year.
When reviewing your report, look for such mistakes as accounts that you didn’t open or incorrect payment histories. If you spot any errors, dispute them immediately with the credit bureaus.
How Long Does It Take to Build Credit?
Especially when you’re starting out, it’s important to be patient. Most people can establish a basic credit score within six months of opening their first account and making on-time payments. But building a strong score? That takes longer, as so much of your score is dictated by how long you’ve had open accounts.
What can help with this is keeping your oldest accounts open, even if you’re not using them much anymore.
Additional Financial Products That Help Build Credit
Beyond credit cards and student loans, other financial products contribute to your credit mix, such as consumer loans and savings opportunities.
Auto loans and RV loans: Car loan co-signers can help you qualify if you have limited credit.
Personal loans: These installment loans diversify your credit mix.
Secured savings accounts: Some financial institutions offer secured loans tied to your savings account, providing an easy way to demonstrate creditworthiness.
Ready to Start Building Credit?
Building credit at 18, 20, or 25 can feel overwhelming. But once you start, developing good money habits now will pay off for decades.
Whether you're in Kokomo, Frankfort, Tipton, or anywhere in Clinton or Howard County, Encompass Credit Union can help. We've been serving Indiana communities since 1953, and we understand what young adults face when starting their financial journey.
Want to get started? Contact Encompass Credit Union today for personalized guidance, competitive rates, and products designed specifically for you to build credit responsibly.