Building credit at 18 is such an indispensable part of becoming an adult, and yet often isn’t talked about much in high school.
An excellent credit history can help you get the best apartments or a decent rate on an auto loan. It can also help you save lots of money on fees and interest. Potential lenders look at it to see if you’re trustworthy enough to pay the money back they give you – with a higher credit score, you’ll often have access to better deals and rates.
If you’re just starting out in life, establishing a good credit history is a particularly perplexing dilemma. You can’t get credit without having a history, and you can’t establish a history without having credit in the first place.
This seeming catch-22 is enough to drive a person bonkers!
While it might seem to you that having no credit history is fantastic because it shows you’re so financially solvent that you don’t need to borrow money, most financial institutions want proof that you can handle credit.
Here are some keen pointers on how to establish credit at 18:
Understand credit basics
Before diving into the bewildering world of credit, work on understanding the basics. Experian, TransUnion, and Equifax, the three big credit bureaus, all maintain a separate credit report, and the information contained in those reports determines your credit score.
Your credit score is a three-digit number financial institutions, and other lenders use to ascertain how much of a loan risk you are. The higher your score, the more likely you’ll qualify for favorable loan rates and terms. The most common credit-scoring model used is FICO, which has a score ranging from 350 to 850.
Here are the components of your credit score:
PAYMENT HISTORY: An excellent payment history can improve your credit score, and a negative one can damage it. Lenders report payments over 30 days late to one of the three primary credit bureaus. Blemishes can stay on your credit report for up to seven years.
- CREDIT UTILIZATION: This percentage is the ratio of your credit card balances to your credit limits. Try to use 30% or less of your available credit.
- LENGTH OF CREDIT HISTORY: The average age of your credit accounts.
- CREDIT MIX: The different types of credit accounts you have, such as personal loans, student loans, and credit cards.
- NEW CREDIT: How many times you recently applied for credit.
The federal government requires the three primary credit bureaus to supply you with one free credit report per year. Financial institutions use your credit report to determine what interest rates they should give you when applying for credit cards and loans. A good score gets you a lower rate, and a poor one usually means a higher rate.
Keep continuous tabs on your credit score
It’s best practice to regularly review your credit reports to ensure everything is accurate. Take pains to scrutinize reports from each of the three credit bureaus with a proverbial fine-tooth comb because financiers might not report information to all of them. If the details listed in one of your reports are erroneous, dispute it with the credit bureau with the wrong information.
You can usually look at your credit score for no cost through your credit card issuer. If a company or financial institution recently rejected you for a credit card or loan, you’re entitled to a no-cost copy of your credit report from the credit bureau the lender used to check on you. You can also get a free once-a-year credit report from each primary credit bureau at AnnualCreditReport.com.
Make payments on time
Because payment history is such an integral part of your credit score, making payments on time is a terrific way to beef up your credit rating. However, promptly make payments not only with credit cards but all your bills, including student and automobile loans.
If you want to ensure that you pay bills on time, consider enrolling in autopay.
Get someone to add you as an authorized user
While only being 18 years old won’t directly impact your credit score, it likely means you have a nonexistent credit history. A good way around this is having another individual add you as an authorized user on their credit card account.
You should only use this technique if you know the person well, they have an excellent history of on-time payments, a relatively high credit limit, and a low or paid-off balance. If they’re concerned that you might run up a big balance, ruining their credit score in the process, have them hold onto your card. That way, you still reap the benefits of their credit history in a way that’s risk-free to your benefactor.
Apply for a secured card
Try applying for a secured card if you can’t get anyone to add you as an authorized user on their credit card. These cards typically require a deposit between $200 and $2,000, which then becomes your credit line.
While you’ll need income to qualify, the threshold isn’t quite as high as it would be with a conventional card. However, you might need a checking or savings account. Just like you would do if you become an authorized user on someone else’s credit card, check to ensure that the credit card company reports your information to at least one credit bureau.
If you repay the money you borrowed on time, you’ll most likely get your deposit back when you cancel the card. However, your lender could keep your security deposit if you don’t. When you have a solid score, consider applying for an unsecured card.
Take out a credit-builder loan
Financial institutions created credit builder loans for the sole purpose of helping people establish a good credit history. While these types of loans aren’t as common as conventional ones, they might be available at your friendly neighborhood credit union or online neobank.
Credit builder loans help you build a positive payment history to boost your credit score. You’ll make regular payments, including principal, interest, and fees, and lenders report these payments to the three major credit bureaus.
However, you won’t receive any money upfront, making it different from a conventional loan. After the loan’s term, you’ll be able to dip into the accrued total of all the payments you made minus interest fees.
Get a store card
Most major retailers offer store credit cards with more lenient approval requirements than credit cards issued by financial institutions. The icing on the cake is they often come with a bonus for new cardholders, such as 15% off your initial purchase.
Just pay the balance off in full each month, as interest rates on store credit cards are typically sky-high.
Take out a student loan
Don’t take out a student loan merely to build credit. However, if you’re planning on applying for one because you’re going to college, a side benefit is that you can use the experience to build a good credit history.
You might want to start by applying for a federal loan because they have the most robust borrower protections, such as forgiveness programs and income-based repayment plans. Most of them don’t even require credit checks. Fill out the Free Application for Federal Student Aid (FAFSA) to start the application process.
On the other hand, private student loans require a credit check, meaning most undergraduates applying for one will likely need a cosigner to qualify. Payment history for these types of loans appears on the student’s and cosigner’s credit reports.
If you responsibly make your payments for an extended period, consider refinancing your student loans. Refinancing might be wise because you could get a lower monthly payment and a lower interest rate. Plus, refinancing could bundle multiple loans into a single account, which could help boost your credit score since you’ll have fewer accounts with outstanding balances.
How to maintain an excellent credit rating
Once you’ve established an excellent credit history, make sure you keep it looking good by paying your bills promptly, not applying for too many credit cards in too short a period, and keeping your credit utilization ratio low.
Keep in mind that a huge factor in your credit score is the length of time your accounts have been open. Longer means better. Even if you’d rather pay cash for purchases, keeping your credit account open will help you maintain a decent credit score.
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