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How to Start Building Credit at 18

Credit is among the various new realities that we all encounter when turning 18 and formally enter adulthood. 

One of the frustrating aspects of having no credit history involves a “chicken and the egg” problem. Lenders may decline to offer you a car loan or credit card because you have yet to establish any history of using credit.

Follow these nine steps and your credit will be in good shape.

1. Understand How Credit Works

An individual’s credit report contains a summary of all credit accounts, information regarding your payment history, outstanding balances, and more. The three leading credit reporting bureaus include Transunion, Experian, and Equifax.

A consumer’s credit score is a three-digit number that is calculated based on the data contained within your credit report. Lenders reference credit scores when assessing the level of risk associated with a prospective borrower. 

The most common credit-scoring model today is the Fair Isaac Corporation (FICO), which uses a range from 350 to 850. FICO® score calculations are computed using a proprietary algorithm that considers the following weighted factors:

  • Your current payment history (35%): Lenders make this assessment by reviewing your overall record of making timely payments and whether you have demonstrated financial responsibility in your credit history.
  • Your amount of debt (30%): How much total debt you owe; particularly, the percentage that this amount represents relative to the overall maximum credit available. Generally, having a credit utilization rate of less than 30% is viewed favorably.
  • Your length of credit history (15%): Lenders prefer that applicants have established a track record spanning several years indicating sustained financial responsibility. Most negative information remains on your report for seven years; however, some information may extend for ten years.
  • Any new (recent) credit accounts (10%): Abruptly applying for or opening multiple new credit accounts may suggest a potential risk in the eyes of a lender. Some applications for new credit result in a “hard inquiry” notation that remains on your credit report for two years. For purposes of calculating a FICO score, only those inquiries from the last 12 months are considered.
  • Your credit mix (10%): Having multiple categories of types of credit account is viewed favorably, such as credit cards (revolving accounts), installment loans, and mortgage loans. 

2. Take Out a Credit Builder Loan

One viable strategy for building credit involves using a credit builder loan, which are accounts that build credit. Credit Strong is a leading company (actually an FDIC insured bank) that offers credit builder loans that help you establish credit and build your payment history.

Check out our plans and pricing here. Build your credit and your savings at the same time!

The application process takes only a few minutes and includes ongoing access to your latest FICO score for tracking your progress as you build credit

3. Become an Authorized User

Another means of establishing and potentially improving your credit score involves being added as an authorized user to someone’s credit card account. An authorized user becomes a secondary cardholder but does not assume ownership responsibility like a joint cardholder.

An authorized user is permitted to use the credit card for purchases; however, they are not liable for making payments. After being added as an authorized user, this credit card account will appear on your credit report and may begin improving your credit score and payment history.

A child or teenager’s credit often is initially established in this manner by becoming an authorized user on their parent’s credit card. 

Keep in mind that this strategy for building credit might backfire and adversely impact your credit history if the primary cardholder makes late payments. 

4. Get a Secured Credit Card

Individuals that are 18 years of age or older may obtain a credit card as a primary holder on the account. Regulations related to the Credit Cards Act of 2009 established some additional requirements for verifying income pertaining to those between 18 to 20 years of age.

Another potential strategy for those seeking to establish credit is opening a secured credit card account. The consumers who acquire secured card accounts generally include those with a lack of credit or a poor existing credit history.

Unlike a traditional unsecured credit card, a secured credit card issuer requires the applicant to make an upfront security deposit. Secured credit cards often initially have a credit limit that is equivalent to the deposit amount commonly in the $200 to $500 range. 

Assuming that the account is repaid properly, the cardholder might be able to receive their deposit back if the credit card is closed. Failing to satisfy the terms of the card agreement may result in forfeiture of the security deposit to the credit card company and hinder your credit score.

5. Student Loans Can Help Build Your Credit

Federal data indicates that Americans currently have roughly $1.5 trillion in student loan debt incurred by more than 40 million borrowers. When paid back responsibly, student loans are a way for establishing and building credit.

Similar to other types of lending activity, student loans will likely appear on your credit reports and impact your credit score. Student loans fall into the category of installment loans similar to those for autos or mortgages.

Borrowers pay back these installment loans over a period that represents an opportunity to bolster your credit history. After paying back all of the principal and interest, the account generally will close, unlike credit cards or other revolving accounts.

Most student loans remain deferred until graduation when payments will commence creating a credit building opportunity. 

How to Manage Your Credit

After initially establishing a credit score and history, it is equally as important to manage your credit responsibly. Some of the critical steps include making timely payments, managing your utilization ratio, and regularly monitoring your credit status.

1. Make Payments on Time

A good credit score is largely the result of making timely payments on all credit accounts. It is also important to remain current on other expenses beyond credit card debt, student loans, or car loans.

For example, falling behind on utility bills, such as electrical service, can negatively impact your credit score. If you have entered a lease agreement for an apartment and have fallen behind on your rent payments, the landlord may file for eviction, which will harm your credit rating.

If you have an auto loan that becomes delinquent, the lender will likely repossess the vehicle, which also has an extremely detrimental impact on your credit rating. Another sometimes overlooked obligation that will damage your credit score is child support payments. 

2. Keep Credit Utilization Low

Borrowers should always avoid “maxing out” credit cards or other credit accounts by using most of their available credit limits. A good credit utilization rate is typically below 30%, with 10% or less seen as excellent.

Credit Utilization Ratio = current amount of debt (owed) / total available credit limit

For example, if you have a credit card with a limit of $1,000, keep the balance at $100 or less to maximize your credit scores.

Keep in mind that credit card accounts with a balance of zero are still contributing to your overall total credit limit. So formally closing accounts with zero balance may have an adverse impact on your credit utilization rate.

Individuals that will likely be applying for a car loan or mortgage loan in the near future should analyze their utilization rate before closing a credit card without a balance. This could potentially reduce their credit score. 

3. Spend Only What You Can Afford to Pay Off

Responsible consumers with good credit recognize that accumulating excessive debt can have drastic consequences. This hilarious SNL skit with Steve Martin and Amy Poehler illustrates this – “don’t buy stuff” that you can’t afford!

Some of the most common mistakes that many younger people make when involving credit are as follows: 

  • Relying exclusively on credit cards for emergencies: Accruing credit card debt each time your car needs a repair or a pet needs unexpected veterinary care is not a wise alternative for having a “rainy day” fund.
  • Using credit cards to finance expensive vacations or other costly “wants”.
  • Making only the minimum payment on credit card debts: Only paying the minimum required amount each month on large balances prolongs the repayment process by months (or years) as interest continues to accrue.

4. Monitor Your Credit Score for Any Changes and Dispute Errors

U.S. consumers may receive one free copy of their credit reports for each of the three credit bureaus annually. Review the listing of entries carefully for any potential errors. The credit agencies today have easy-to-use website forms for electronically submitting a dispute. 

Unfortunately, these free credit reports won’t contain credit scores. That’s one reason why each Credit Strong account holder is given access to their FICO score at no additional cost.

Final Thoughts

Having good credit allows access to financing for major purchases such as a car or home and it has the ability to help you receive lower interest rates on loans that may save you thousands.

In a worse-case scenario, lacking a credit history or having poor credit may prevent you from leasing an apartment because many landlords and property management companies check your credit. 

If you follow the steps described above, you’ll set yourself up with good credit for the long term.

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