5 Ways for Young Adults to Build Credit

Whether your are just starting college or working straight out of high school, there are ways you can establish a good credit rating at a young age. If you have a social security number and are 18 years old or older, you have a credit report. It does not matter if you do not have a single line of credit, a credit report was created for you.

Many young adults do not realize that credit reports are requested by more than just lenders and companies offering credit cards. Landlords, utility companies, insurance companies, and even future employers pull credit reports in order to assess reliability and rates. Your credit report paints a picture of how responsible, stable, and reliable you are.

Here are five ways to get ahead of the credit game.

1. Open a Checking and Savings Account.

For those not 18 years old, you can open an account as long as a parent signs on with you. Opening and maintaining these two accounts tell lenders that you are responsible enough to manage basic accounts.

2. Get a Credit Card.

Credit cards are bad only if you abuse them. A safe way to utilize a credit card is to make sure you do not run up the balance. Pick one or two of your newly acquired bills. Charge those bills to your credit card and pay it off, in full, every month.

3. Know Good Credit Discipline.

What is good credit discipline? Here are the basics. First and foremost, always pay your credit cards on time. If you can pay more than the minimum due, then do it. You will earn most points towards your credit score if your balance is less than 10% of your credit limit. If you can not stay below 10%, under 30% is still considered good.

Also, if you close a revolving account, such as a credit card, you will lose points off your credit score. As the account ages, you gain points over time. If you want to get rid of a credit card because temptation is too great, simply cut your card or put it in a bowl of water and freeze it. Do not close your credit card account.

4. Pay Off an Installment Account.

An installment account is a loan, such as an auto or personal loan. I recommend taking out a small loan, even if you do not need to buy anything specific. You can start out as low as $500 with some lenders. The best thing you can do at a young age is to put the amount of this loan into a emergency savings account or an investment vehicle. Be sure you can afford the monthly payment.

5. Use Someone Else's Credit.

No, I am not talking identity theft. There are two ways you can use someone else's good standing to make one of your own.

Be an Authorized User - Ask one of your parents or a trusted family member to have you as an authorized user of one of their credit cards. By doing this, their good standing with the account gets copied to your credit report. If your parents are not comfortable letting you have a credit card with their account, then let them keep or destroy the card. You will still get the favorable credit reporting every month, even though you do not use the card yourself.

Have Someone Cosign a Loan - There are parents out there that will take out a loan in their name and pay it for their child's education. If you have parents that are trying to do this, stop them. Ask them to cosign a loan that will be primarily under your name. They can still pay off the loan if they want, but by doing the latter, they will be helping you build your credit history.

The time to start building credit is as early as possible. If you do wait, you will find it very difficult to find a lender willing to give you any loan. If you do find a lender willing to loan you money, you will definitely have a much higher interest rate than if you took the time to build your credit.

Carmen Wong Ulrich of CNBC's "On the Money" explains the importance of your credit report best when she says, "Your credit report is your adult report card." Be sure you have the best credit report possible, because this will make or break your financial quality of life down the road. This "adult report card" will follow you until the day you die.