Many Young Adults Don't Understand Credit—Here's Where to Start

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Good credit can be an important foundation for your financial life. It can save you money and help you qualify for more credit cards, loans, and housing options. In a recent national survey titled “Credit Scores Uncovered: Consumer Relationships with their Scores”, FICO found that 85% of U.S. consumers also feel more secure in other parts of their lives when their credit score is healthy.

However, younger adults might not be sure where to start. Gen Z (those born after 1996) are between 11 to 26 years old today—they may be too young to open credit accounts in their name or are just starting on their credit journey. The survey found that one in five Gen Zers only understands credit scores a little, or not at all, compared to 96% of Boomers who say they completely or somewhat understand their credit scores.

Although someone who is brand new to credit might not have an excellent score yet, starting early and understanding what affects your FICO® Scores can be important for improving your FICO Scores over time.

How to establish credit for yourself or a loved one

Almost a third (29%) of Gen Zers either don't know if they have a credit score or think they don't have one. Whether you've recently got your first credit card or loan, or know a young adult who might have questions, it's important to understand how to establish your FICO® Scores.

Your FICO® Scores are based on the information in your credit report from either Equifax, Experian or TransUnion. And the minimum FICO Score requirements are:

You have to have an account in your credit report that's been open for at least six months, and
You have to have an account that's been updated within the last six months (these can be the same accounts), and
Your credit report can't indicate you're deceased

Many people satisfy these requirements after opening a credit card or taking out a loan, such as a student loan. However, you have many options:

If you haven't used credit before, you could look into products that can help you establish your credit for the first time, such as secured credit cards and credit builder loans. Some of these might have fees, but there are also many ways to start building your credit for free.
If you've established your credit and want to help someone else get started, you could add them as an authorized user on one of your credit cards. You'll still be responsible for the entire bill. However, the card issuer may report the account to the credit bureaus under both of your names, which can help the authorized user establish and build their credit. Card issuers' requirements and reporting rules can vary, so check the terms and consider the risks before adding someone as an authorized user.

Having or being a creditworthy cosigner can also help someone who is new to credit get approved for a loan. But cosigning can be risky because both people are responsible for the debt. If the primary borrower can't afford the payments, the cosigner will be on the hook, which could damage your relationship and even wind up hurting the cosigner's FICO® Scores.

The benefits of good credit

Most people know that good credit can help their finances, and many Americans already have a good FICO® Score—the average FICO Score 8 was 716 as of April 2022. But you may be surprised by all the ways that your credit can affect your life.

Save money

A good FICO® Score could help you save thousands of dollars with lower interest rates and upfront fees on loans and credit cards. Additionally, a good credit history can lead to savings even if you're not borrowing money because it could impact your insurance premiums and whether you have to pay a security deposit to open a new utility or telecom account.

Have more options

Having good credit can also make qualifying for loans and credit cards easier, especially if you want premium credit cards that come with lots of cardholder benefits and rewards. Your FICO® Scores can also be important when you apply to rent a home, and some employers may consider your credit history (but not a credit score) when you apply for a job or promotion.

Feel more secure

About a third of Americans don't feel financially secure. While good credit won't necessarily make up for worries about your job or lack of income, the access to additional options and savings can be important. Overall, 85% of U.S. consumers feel more secure in other aspects of their life when they have a good FICO® Score.

Learn more and track your FICO® Scores

Sometimes bad credit can be the result of unfortunate circumstances, such as a layoff or medical emergency leading to unpaid bills, but 84% of Americans rightly feel that they have the power to influence their credit scores. However, you need to learn (and can teach others) how your FICO Score is calculated and what will—and won't—affect your score. myFICO has a lot of free educational content on how you can improve your credit and what goes into determining FICO Scores.

You can also monitor your credit to track your progress. Although only about 37% of people check their credit scores monthly, many organizations offer customers a FICO® Score through the FICO® Score Open Access. Check the list to see if you already qualify or could sign up for an account and monitor your score for free. You can also sign up for the FICO Free Plan to get your FICO® Score, for free, no credit card required.

Louis DeNicola

Louis DeNicola is a finance writer based in Oakland, California. He specializes in consumer credit, personal finance, and small business finance, and loves helping people find ways to save money. In addition to FICO, Louis works with a variety of financial services firms, credit bureaus, and educational websites, including LendingTree, Credit Karma, and Experian.