Personal finance and building a strong credit profile can be overwhelming to young adults, especially since there's often no clear way to learn about things like the three major credit bureaus, the importance of a presentable credit history, and others factors.
keep in mind, most young adults don't have much experience handling money or learning how to read credit reports.
So the moment they get their credit card account, they might let themselves go too much with it. And as a result, they can quickly hit their credit limit but fail at making timely payments.
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Of course, having a poor payment history translates to a bad score, which can cause many financial problems that you'll only understand in adulthood.
So if you want to learn more about this mysterious financial world and credit score, keep reading for our guide on how to build credit at 18.
The Short Answer On How To Build Credit
You should start building (good) credit at a young age to make your financial obligations easier in your twenties and moving forwards.
For example, it could land you more favorable interest rates, more housing and insurance options, and a higher credit limit.
To do so, you could start by becoming an authorized user on someone else's credit accounts, such as your parent's. But if you don't have that option, you can use a starter or secured credit card.
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And, of course, the major challenge is staying financially responsible. Avoid overspending and defaulting on payments.
You can also look into using credit repair software or DIY option.
Credit Scores Explained
The credit score is a scale from 300 to 850 that indicates how reliable you are to lenders. In other words, the higher your score, the more likely you will pay back borrowed money on time.
Credit scores are built on your payment history accounts. A positive payment history translates to a favorable credit score, which is around the late 600s and upwards mark.
Also, three credit bureaus dominate the market: Equifax, Experian, and TransUnion. And while there are other credit bureaus, they don't have nearly as much significance.
You can also watch my YouTube Video on the best credit repair tips:
Understanding Other Financial Terms
You'll certainly come across other credit jargon after you get your card. So before we proceed, we'll clarify the most common terms.
The annual percentage rate, or APR, is an interest rate you'll pay if you default on payments in each billing cycle. For example, if you borrow $100 and pay back $115, your APR is 15%.
Another important term is credit utilization ratio, which refers to your balance (how much money you have) divided by your credit limit (how much you're allowed to spend via card).
Experts recommend you keep your credit utilization rate under 30%.
Why You Should Start Building Your Credit History Now
Maybe you think you're too young to start worrying about credit and feel like postponing it until you finish college.
But it's important to build credit from a young age since it can land you better deals when buying new things such as car loans or paying for insurance.
Your score also plays a key role when buying your first car or house.
And your potential employers might even explore your credit history if it's your first job. Most higher end jobs will run a credit check such as federal jobs.
Benefits of a Good Credit Score
Still not convinced or feel like you're too young? I understand. So we've also prepared a quick list of the benefits you'll enjoy in adulthood if you can maintain a solid credit score.
And be careful. You might think you're too young right now and brush your credit score aside until later.
But recovering from a bad credit history can take months or even years. So it's best to start building credit at 18 to prepare for the future.
Better Interest Rates Rates
When you're applying for a credit card, the issuer checks your credit score to determine what your APR should be. And those with a low credit score get higher APRs, which can become a vicious cycle.
But if you establish a solid credit score early, you can land some good APR deals when you renew or upgrade your credit card.
You'll thus be saving a lot of money that would otherwise go to your credit card company and spend it on other things.
Lower Car Insurance Rates
Car insurers are very fast to check their customers' credit scores to determine what their insurance rates should be, alongside other things like insurance history.
And if car insurance carriers find you have a poor credit history and score, you'll be deemed a risky customer and likely face higher rates. And you might even be denied insurance by certain companies.
In contrast, you'll earn better premiums if you have a good score.
Other insurance carriers, like home insurance, might also check your score before pricing your premiums. So these benefits extend beyond your car insurance.
Higher Credit Limits
Your issuer determines your credit line by considering your income and credit score. You probably won't need a very high limit when you're young.
But you won't be able to get one anyway if you don't have a respectable FICO score.
But when you're older and realize that you need to borrow thousands of dollars, you'll need a good score to prove to your lenders that you'll return that money on time.
And the same rules apply to bank loans if you need to borrow an even larger sum.
Easier Access to Services
When you start handling your finances and buying things independently, your FICO score plays a big role.
For example, you might not need to pay the infamously-inconvenient security deposit when you sign up for utility services, like water, electricity, or internet, in your new home.
Cell phone providers can also give you better plans if your score shows you can be trusted financially.
More Housing Options
Most landlords run an extensive background check on their potential tenants. And if you're young (around college age) and looking for an apartment, your landlord might ignore your lack of credit history.
But if you've already established your score, you'll appeal to more landlords and increase your chances of getting that apartment you want.
You can use rent reporting services to increase your credit score by reporting your on-time rental history.
You can read more on the best rent reporting services here.
On the other hand, adults with a poor FICO score will have a much harder time finding a landlord who'll approve of them.
Appeal to Employers
Employers are screening their potential hires extensively in an increasingly competitive world to find the perfect candidate.
And while your score is far from the biggest qualification on your resume, it can make you look better in the recruitment process.
But instead of checking scores, recruiters tend to look at your payment history because factors like consistent late payments and other signs of potential bankruptcy can make them rule you out.
Tips to Building Credit at 18
With that out of the way, how do you start to build credit at 18? Especially you can face some trouble qualifying for a good credit card without a score.
We've considered the best options for young adults to start their journey and compiled them below.
Become an Authorized User on Someone Else's Card
If you've never had a credit card, it can be hard to find a good one without a history. Fortunately, you can establish a good history if you become an authorized user on someone else's credit card.
Authorized users enjoy the benefits of the transactions of their primary cardholder. And you don't even need to make payments yourself to enjoy these benefits.
The problem is that an authorized user is susceptible to their primary cardholder's history, the good and the bad. So make sure you do this with someone you trust, such as a parent or close family member.
Get a Starter or Secured Credit Card
If you can't share a credit card with someone else, you can explore starter credit cards like security cards.
A secured credit card requires you to deposit a certain amount, which becomes your credit limit. But you'll still need an income to get a secured card.
Secured credit cards are traditionally much more lenient on people with a poor or no score, but you can use them to establish credit. And once you have what you need, you can cancel the card and get your deposit back.
Another common starter credit card option is student cards.
If you're a college student, you might qualify for student credit cards, which don't require a deposit like secured ones.
Use a Credit-Builder Loan
A credit-builder loan, as the name implies, helps the borrower build credit. It's basically free credit score.
Credit-builder loans work by "lending" you some money, which stays in a savings account that you'll only access when the loan ends.
My favorite credit builder apps are:
- Credit Strong
You'll typically find credit-builder loans in credit unions or small banks. And you'll probably need proof of income to be eligible, too.
The financial institution you're with should report your loan activity to the big credit bureaus. And by the end, you'll have a better score and even some interest on the loan.
Avoid Late Payments
I know this sounds like the obvious cop-out answer, but it's the backbone of credit cards and a good score.
Make sure you pay all your credits and bills on time. Otherwise, your credit card company might report you to the three big bureaus, and your score will take a heavy hit.
Maintain Low Credit Card Balances
Keeping your credit utilization rate low will have a huge positive impact on your score.
Generally, experts recommend you keep it under 30%. So if your credit line is $1,000, don't spend over $300 without paying it back.
Keeping your credit utilization rate low indicates that you don't have problems paying your obligations on time, which impacts your score heavily.
Use Automatic Payments
When you're a young adult starting to pay their bills and buy their things, it's easy to miss a payment here and there. And while it's okay to miss a payment or two, you should be careful as they can snowball into large debt and a bad credit score.
I recommend you consider autopay and follow the other tips so that you don't miss a single bill.
Check Your Annual Credit Report
Credit card companies normally offer you a free credit report every year. Use this opportunity to monitor your score after establishing it since an excellent score will help you tremendously later.
You can order your credit report online at annualcreditreport.com or call (877) 322-8228.
Frequently Asked Questions
Do You Automatically Get Credit at 18?
No. A common misconception is that your score starts at 300, which is the lowest on the 300-850 FICO scale. In reality, if you don't have a credit history, you don't have a credit or FICO score, regardless of age.
What's a Good Credit Score for an 18-Year-Old?
A good FICO score typically starts from the late 600s to the early 700s, while an excellent one is near or above the 800 mark.
And although credit scores don't account for age, the trend is that the older you are, the better your score is. So for 18-year-olds, a good score would start around the 660-670 mark.
How Fast Can I Build My Credit Score?
It can take a month or two to establish your score. But reaching a good score of 650-700 would take at least six months of making timely payments if you don't have a credit history.
Final Words On Building Credit At 18
You may not understand why you should build credit at 18. But hopefully, now you do.
And I hope you don't neglect the tips I've highlighted and focus on establishing good credit since it'll lift a heavy burden off your future.
And although you can become an authorized user of a trusted person's credit card account and make on-time payments, you have to realize that building and maintaining a good credit score boils down to self-discipline and good financial responsibility.
And lastly, make full use of your free annual credit report to monitor your progress every year.