You’ve been anxiously awaiting your 18th birthday. Now that it’s here or has recently passed, it’s time to start thinking about credit and how you’ll build it up. But why is it important, especially considering that you’re likely still in high school and have other priorities to focus on? That’s a valid question that you’ll discover the answer to in this guide.
Why Should You Build Your Credit Early?
In short, credit impacts almost every area of your life. And that three-digit number, which is referred to as your credit score, tells lenders and creditors how you behave as a borrower. It can also be the difference between getting approved for a credit card, loan or even housing, and it plays a role in how much you’ll pay for credit (or the total borrowing costs).
To illustrate, when you buy your first car, the lender checks your credit score and uses it to determine if you qualify for a loan and what terms you’re eligible for. The same applies when you apply for a personal loan, private student loan or credit card.
Some landlords also check credit and will deny you housing or request a higher security deposit if you have little to no credit history or a poor credit score. So, the apartment you dreamed of occupying when getting your first place could be out of reach.
Furthermore, some states allow auto insurance providers to use insurance-based credit scores when setting premiums. This means getting coverage on your own can be costly if you haven’t yet established a solid credit score.
These are just some of the reasons why you should start building credit early. But as you can see, getting started as soon as possible, instead of waiting around, can be very beneficial as you’ll give yourself ample time to establish a healthy credit score.
When Is The Earliest You Can Start Building Credit?
It’s possible to start building credit before you turn 18 by becoming an authorized user on your parent’s or legal guardian’s credit card. However, keep in mind that some credit card issuers have a minimum age requirement, so it’s best to inquire before moving forward.
When you become an authorized user, the account history will be added to your credit profile. However, you won’t be responsible for the outstanding balance and can request to be removed from the card at any time.
Still, you want to ensure the account you’re being added to has a perfect payment history. It’s equally important that the utilization rate, or the amount of the credit limit in use, does not exceed 30 percent since both factors heavily influence FICO score ratings.
How to Build Your Credit at 18
If you’re wondering how to build credit at 18, these tips will help you get started.
Become an Authorized User
As mentioned above, becoming an authorized user is a simple way to build a credit history from scratch. You don’t have to have a physical card in your possession for your credit score to improve. However, the account holder has the option to request a card with your name on it, even though you won’t be held liable for the purchases you make using the card.
Once you’re added, review your credit report often to confirm the account is in good standing. You also want to make sure that the credit utilization rate is low, or your credit score could take a hit.
Get a Secured/Starter Credit Card
Traditional credit cards are always an option when starting your credit-building journey. But you may have more luck with a secured credit card. They require a security deposit that’s usually equivalent to the credit limit and can be used like a typical credit card. Ideally, you want to pay on time each month and keep the balance low to build your credit score fast. Then, after an extended period, the credit card issuer may upgrade you to an unsecured credit card and refund your security deposit.
If you don’t have the funds to make a security deposit, try a starter credit card. Some credit card issuers offer these cards with very low limits. Be sure to read the fee disclosures, though, to determine if the borrowing costs are reasonable or excessive.
Take Out a Student Loan
Federal and private student loans help offset higher education costs. Both are reported to the three major credit bureaus – Experian, TransUnion and Equifax. If managed responsibly, a positive payment history can give your credit score a boost.
Be mindful that federal student loans offer more protections to borrowers, so they should be your first option. Furthermore, you’ll generally need an established credit history to take out a private student loan, which means you may have to bring a co-signer on board. Most importantly, only resort to student loans if you actually have an unmet financial need with regard to higher education expenses, and not solely to build credit.
Consider Getting a Job
Your employment status has no bearing on your credit score. However, having a steady source of income will work in your favor when it’s time to apply for your first credit card or loan. It demonstrates to the lender or creditor that you have the means to repay what you borrow, which is on their list of top priorities. Ultimately, they want reassurance that you can afford to make timely payments, and stable employment demonstrates just that.
Opt for a Credit-builder Loan
Credit builder loans are available through some community banks, credit unions and online platforms. They operate a bit differently from traditional loans, though. Upon approval, the loan proceeds will be deposited into a savings account. You’ll make monthly payments during the loan term and receive the funds once the balance is paid in full.
The key benefit is you’ll build credit while saving money since credit-builder loans report payment activity to the credit bureaus.
Other Things You Should Keep in Mind When Building Credit at 18
Building credit at 18 is an important first step into adulthood. Here are some other important considerations to be mindful of during the process.
Understand How Credit Works
If you understand how credit works, figuring out ways to boost your credit health won’t be as challenging.
For starters, the data in your credit report is used to compute your FICO score, or the credit score used by 90 percent of lenders and creditors to make lending decisions. But if you aren’t familiar with credit reports, they’re simply financial report cards that include your credit accounts along with the balance and payment history of each.
Your FICO score is determined by these five factors from your credit report:
- Payment history (35 percent)
- Amounts owed (30 percent)
- Length of credit history (15 percent)
- Credit mix (10 percent)
- New credit (10 percent)
Pay Your Balances on Time
As evidenced by the scoring formula above, making timely payments on all your credit accounts is vital. Otherwise, you risk late payments being reported (once accounts are 30 days past due), which could wreck your credit score and hurt your creditworthiness in the eyes of lenders.
Furthermore, late payments and collection accounts linger on your credit report for up to seven years. The negative impact dwindles over time, though, so one late payment doesn’t mean you’re stuck with a lower credit score forever.
Don’t Overdo It and Keep Your Balances Low
Your credit utilization ratio accounts for 30 percent of your credit score. Lenders and creditors like to see your balances at or below 30 percent of the total credit limit – 10 percent or lower is even better. So, if you have a $500 credit limit on four cards, try to keep the total balance on all cards at or below $600 to have the best chance at building a healthy credit score.
Monitor Your Credit
Mistakes happen, and incorrect information sometimes finds its way into credit reports. But by reviewing your credit reports for inaccuracies or monitoring them for sudden changes, you can identify issues that could be dragging your score down and file disputes to have them rectified.
