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4 money moves you can make in your 20s to build strong credit by your 30s

Twenty/20

The earlier you start building credit, the better, according to experts.

Your credit score is one of the most important numbers in your financial life. If you start building and improving your credit in your 20s, you'll be in a better position to be approved for a mortgage, an auto loan, or a rewards credit card in the future, says Ted Rossman, a credit analyst at Bankrate.

Having strong credit can help you in less expected ways, too: It can mean you pay less on a cellphone plan, for example, or less money in fees to set up utilities.

As you make financial decisions, like big purchases and timely payments on your bills, you establish your credit history, which informs the three-digit number known as your credit score. Your credit score can fluctuate, though, and is more of a snapshot than summary of your credit report.

VIDEO1:5001:50
3 steps to build your credit score with Matt Schulz

Video by Ian Wolsten

The length of your credit history makes up 15% of your overall credit score, so making good choices early on factors into your score. "There's really no substitute for time in this process [because] you can't get that time back," says Rossman.

The average FICO credit score for people ages 20 to 29 is 662, which is considered "fair." The average rises to 673 for people ages 30 to 39, and the average credit score for Americans overall is now 703, which is considered "good."

Chart showing meaning of FICO score ranges
Chart showing meaning of FICO score ranges
Chart showing meaning of FICO score ranges

Here are four money moves you can make in your 20s to establish strong credit in your 30s.

1. Find a good starter card

If you're building your credit history from scratch, find a starter card with a low credit limit so you're less at risk of going into debt, says Matt Schulz, a credit card industry analyst at CompareCards.com.

He recommends a secured credit card, which often has a credit limit of $200 to $250 and requires a deposit equal to the credit limit to open the account.

"It can be really hard to get credit if you don't have credit," says Schulz. "The good news is that credit cards are generally the easiest way to get started, in part because they're the easiest to get. The trouble is that what is available for credit newbies often comes with sky-high APRs, lots of fees, and few rewards."

It's important to choose a safe card early on and to get into the habit of paying your bills before looking for credit card rewards. For instance, if you have trouble paying off your bills on time, you won't be able to reap credit card benefits because your interest rates will outweigh your rewards and you could end up in debt.

Once you've established good habits, you can trade up to a rewards card that complements your spending habits.

VIDEO2:4402:44
How to successfully use a cash-back credit card

2. Pay your bills on time and in full

Your credit score is generated using an algorithm that includes several factors, including your spending history and your ability to pay off debt. The largest portion, 35%, is your payment history. That's why paying your bills on time and in full is "the whole ballgame" when it comes to building credit, says Schulz.

Schulz says a negative item, like a late payment, can stay on your report for seven years. That means if you make a late payment at 25 years old, it will remain on your credit report until you're 32.

A single late payment can also drag down your credit score by as much as 100 points, adds Rossman. He says the best ways to prevent yourself from missing a payment is to check your statement every few days, set up autopay, and create calendar reminders for when your bills are due.

FICO breakdown
Factors that impact your credit score
Social chart title
kiersten schmidt/grow FICO

3. Work on paying off student loan debt

Paying off any debt, like student loans, consistently over time will help you establish your credit history and boost your credit score, says Rossman.

Student loans are a type of installment debt, or debt borrowed as a lump sum and paid down in regular installments. Installment debt can actually be good for your credit: When you make student loan payments on time each month, you're establishing credit history while chipping away at your debt.

"If you have student loan debt or any sort of loan obligation, make sure that you're paying those on time," says Rossman.

4. Use credit sparingly to maintain a low utilization rate

The second most important factor when determining your credit score is your credit utilization rate, or the ratio between how much credit you're using compared to how much credit is available to you. For example, if you put $100 on a credit card with a $1,000 limit and you only have one credit card, your utilization rate is 10%

A general rule of thumb is to keep your utilization rate below 30% of your available credit, and one way to do so is by using your credit card sparingly. Rossman suggest putting only small charges on your credit card to start, like a grocery bill or recurring Netflix subscription. That way, you keep your monthly bill at a minimum while establishing a credit history.

Then, as you get comfortable paying your bills, you can charge larger purchases to your credit card. "Ideally, in the future, you can put large purchases on your credit card, pay it off in full, and earn rewards," says Rossman.

"People tend to overthink credit, but it's really just about paying your bills on time every time, keeping balances as low as possible and not going crazy applying for too much credit too often," he says. "If you do those three things, lather, rinse, repeat over the years, your credit's going to be just fine."

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