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How to Build Credit at 18
Before you dive into adulthood, it's important to start building your credit so you can enjoy all the perks that come with it.
Building good credit is an important step as you transition into adulthood. Having a solid credit history and a high credit score is crucial when you need to make big purchases like buying a car, paying for school or finding your first home.
So, you've hit the big 18 and you're ready to take on the world of "adulting!" But before you dive into adulthood, it's important to start building your credit so you can enjoy all the perks that come with it.
When you hear people talk about building credit, they’re referring to your personal credit history and your credit score. These two things affect your ability to borrow money.
Credit history refers to a detailed listing of money you’ve borrowed, from whom and how well you did at paying it back.
Lenders also look at:
● Payment history: Do you always make payments on time, or are you sometimes late? Keeping up with your payments is one of the best ways to show lenders that you are responsible.
● Credit utilization: A ratio that tells lenders how much of your available credit you are using. For example, if you have a credit card with a $500 limit and you charge a $100 purchase, you are using 20% of your available credit. Lenders typically like to see utilization ratios of 30% or lower.
● Length of credit history: The longer you’ve had credit, the better — which is why building your credit early is so important.
Your credit score is a three-digit number that gives lenders an overall picture of your creditworthiness at a glance.
There are several types of credit scoring models, with FICO® and VantageScore being the most common. Both have score ranges of 300 to 850, with higher being better. There are also three main credit reporting bureaus: Experian, Equifax and TransUnion. These are the companies that keep track of your credit history and provide it to a lender when you apply for credit.
Alright, so how do you start building good credit?
Open an account
To build credit at 18, start by opening a bank account if you don't have one already. Use a debit card to make purchases and maintain a positive balance to show your bank or credit union that you can handle your finances responsibly.
Consider a starter credit card
Consider getting a starter credit card or a secured credit card to start building your credit history. Secure credit cards require a cash deposit (say, $200 or $500) that the card issuer can use as a form of payment should you ever fall behind or stop making the agreed-upon payments. Secured cards help you build credit with little to no risk of overspending. If you don’t have the cash to put down upfront, look for an unsecured credit card that’s specifically designed for young adults or students, such as the Visa® College Real Rewards Card from Desert Financial. These options can help you establish good credit habits early on.
Be an authorized user
If you're feeling unsure about managing credit cards and loans on your own, you can always ask a parent or a responsible relative to add you as an authorized user to their account. This way, you can benefit from their payment history without having to worry about missing payments yourself. It's a great way to ease financial responsibilities!
Look at student loans
Thinking about taking out loans for school? Whether you choose federal loans through the U.S. Department of Education or private loans, keep in mind that you will need to repay these funds later with interest. So, be sure to consider your budget and future earning potential.
Pay down balances quickly
Be mindful of your credit utilization (the amount of available credit you’re using). Let's say you have a $400 balance on your credit card with a $500 limit, which means you’re using 80% of your available credit. It's generally recommended to keep your credit usage under 30%, so it’s a good idea to try to pay down high balances as soon as you can.
Pay your bills on time (or early!)
This is the #1 most important thing you can do to maintain a good credit score. Your car and mortgage payments, credit cards, student loans and some rent payments are reported to the credit bureaus each month, and potential lenders want to see that these payments have been made on time. While things like utility and medical bills aren’t reported monthly, they may send your account to collections (debt collectors) if you fall too far behind – which could mean additional fees and a negative impact on your credit.
Now that you’ve turned 18, it’s important to lay a foundation for the goals and milestones you want to achieve as an adult. The path to those goals starts by building credit, which can help you achieve many of the larger financial goals you might have in mind. By taking small steps to build positive credit and improve your credit score, you'll be setting yourself up for the kind of life you've been excited about.
DISCLOSURES
The material presented here is for educational purposes only and is not intended to be used as financial, investment or legal advice.
