Credit is a critical concept that plays a huge role in your financial life, and understanding it can set the foundation for future financial success. In simple terms, credit is the ability to borrow money or access goods or services with the understanding that you’ll pay for them later. When lenders, such as banks or credit card companies, offer you credit, they’re essentially giving you access to money with the expectation that you’ll repay it, often with added interest. But credit isn’t just about borrowing—it’s about how trustworthy you are as a borrower.

Every time you use credit—whether it’s a credit card, a student loan, or even financing a car—you build a financial profile known as your credit history. This history is collected and summarized into a credit report, which keeps track of how responsibly you’ve managed borrowed money. Your credit report is then used to calculate your credit score, a number that tells lenders how likely you are to repay loans on time. The higher your score, the better your creditworthiness, and the more favorable terms (like lower interest rates) you’ll receive from lenders. This score can affect major life decisions, from getting a loan to renting an apartment, and even job prospects in some industries.

Why Credit Matters for Young Adults

For young adults, establishing good credit early is crucial. At this stage in life, many financial firsts—like getting a credit card, applying for student loans, or buying a car—can impact your financial future. By learning how credit works and building good habits, you can set yourself up for a strong financial position. Credit affects your ability to take out loans for education, finance a car or home, and even determine whether you qualify for certain job opportunities, as some employers check credit histories during hiring.

Mismanaging credit can have lasting consequences. If you miss payments, max out credit cards, or ignore your debt, it can damage your credit score and make future borrowing more expensive or difficult. That’s why it’s so important for young adults to not only understand credit but to use it wisely. Developing strong credit-building habits—such as paying bills on time, keeping credit card balances low, and avoiding unnecessary debt—can open doors to financial opportunities and ensure long-term financial well-being.

Visualizing the Impact of Credit

Credit Score Breakdown: What Makes Up Your Score?

Credit scores are calculated based on five key factors, each contributing differently to your overall score. The following chart breaks down these factors to help you understand which actions have the biggest influence on your score.

Credit Score Ranges: What Do They Mean?

Below is a graph showing the typical credit score ranges and what they signify for lenders.

Building and Maintaining Good Credit

The earlier you start building your credit, the easier it becomes to maintain and improve it. Here’s a simple guide to getting started:

1. Start with a Secured Credit Card
   If you’re new to credit, consider opening a secured credit card. This requires a cash deposit upfront, which serves as your credit limit. Using a secured card responsibly—by making small purchases and paying them off in full every month—will help you establish a positive payment history.
2. Pay Bills on Time
   Payment history is the largest factor in your credit score. Even one missed payment can damage your score, so it’s essential to pay all bills on time. Set up automatic payments or reminders if necessary.
3. Keep Balances Low
   Try to use only a small portion of your available credit. Keeping your credit utilization rate under 30% shows lenders that you’re managing your credit responsibly.
4. Limit New Credit Applications
   Each time you apply for credit, lenders perform a “hard inquiry,” which can temporarily lower your score. Avoid applying for multiple credit accounts in a short period.
5. Monitor Your Credit Report
   Check your credit report regularly for errors or signs of fraud. You can request a free copy of your report from each of the major credit bureaus annually through AnnualCreditReport.com.