A credit score is an important tool that will affect many of the decisions you make throughout your life. Learning how to build credit at 18 is an awesome first step toward a better financial future.
Most young people don’t know the power of a credit score and all the aspects of your life that it is going to affect. For example, your credit score is used to decide if you can qualify for car loans, student loans, mortgages, and it’s even a factor in applying to rent an apartment.
You’ll quickly learn that people are very weary of loaning money to someone with a poor credit score since they can’t trust them to pay it back on time or in full.
There tips on how to build credit at 18 are going to establish a good base for your future financial health, so let’s dig in to the tips!
How to Build Credit at 18
1. Be an authorized user on a parent’s card
One of the easiest ways to grow credit without a ton of risk is to become an authorized user on someone else’s card. The cool thing about this is that you don’t ever have to even use a credit card to start gaining some credit history using this method.
Now, I understand that this isn’t an option for a lot of people since their parents may not be in the best financial situation so it could actually harm their credit.
However, There are some serious risks to both you AND the cardholder in this situation. If one of you starts charging a ton of money or there’s a payment missing, it could hurt your credit score. You need to make sure that the person who you decide to use in this situation is smart with their money and won’t end up hurting you in the process.
2. get a secured credit card
A really good option if you’re unable to find someone who will let you become an authorized user is to get a secured credit card. So, what’s different from a secured credit card and a regular credit card?
A secured credit card require you to make a deposit (usually $200-1000) that you use as more of a line of credit. This method helps banks recover any losses if you’re unable to pay back the loan in its entirety.
So, let’s say you get a $500 secured credit card, you’d have to make a $500 deposit on the card to begin using it. As long as you make your payments each month a secured card is an amazing way to start building up your credit without the risk.
Most secured cards are willing to pay back your deposit after a certain period if they see you to be trustworthy and they know you’ll pay back the balance, so don’t worry about that money, you’ll get it back!
3. make all payments on time
One of the largest factors to a credit score is your payment history. This section of your score is entirely based on your ability to make payments and to make those payments on-time. Missing even one payment could drop you upwards of 50 points which can take quite a while to build back up.
It’s ideal to pay off your credit card entirely because that way you can skip out on paying interest, especially since your credit card probably has a 19.99% interest rate (or higher) since you’re just starting out.
For example, having a maxed out credit card with a $1,000 limit will cost you around $200 a year in interest which isn’t a great way to spend your money.
4. understand how a credit score works
As soon as you turn 18 (or ideally before you turn 18) it’s extremely important that you learn the basics of credit so you can know how your score works.
In its most basic terms, your credit score is a 3-digit number that is used by lenders to see whether or not they want to extend credit to you and can also be used by people like landlords to see if they want to rent to you.
The higher your credit score the better you’re going to look to possible creditors. The higher your score, the better interest rates you’ll get as well. Ideally, you’ll have a credit score in the 700s.
At the end of this post, I’m going to go into some pretty basic detail about how a credit score works and all the things you need to know. So be sure to read that if you’re unsure!
5. get a student credit card
If you’re currently enrolled in post secondary education you can apply for a student credit card. These cards are awesome because they usually have no yearly fee, a low credit limit, and are relatively easy for you to apply for.
They will help you build your credit with low risk because the limit is low and you won’t throw yourself into too much debt.
6. take out a student loan
Student loans are an awesome way to build up your credit score because the second you open the account (usually at 18) you start to build up a credit history.
Credit history is one of the hardest things for young people to achieve since they’ve only just started building their credit so opening accounts right when you turn 18 is awesome.
However, a student loan won’t actually affect your credit score until you start to make payments on that account which doesn’t happen until a few months after you graduate.
Of course I’m not saying that you should go into debt for student loans just so you can build up your credit! If you can afford to pay for school without loans, do that!
7. use credit cards responsibly
One of the best ways to build credit at any age is to use credit responsibly. Going out and getting 10 credit cards and maxing them all out is going to hurt you for years to come and you may never get out of the cycle of debt.
We have an entire article on some credit card rules that you should follow that we highly recommend you take a look at.
8. don’t try and open a bunch of accounts at once
A lot of new credit users believe that having more accounts equals more opportunities to build credit. However, this is entirely false! There are two huge reasons why you should never open a bunch of credit accounts in a short period of time.
The first is your credit score. Every single time you apply for a credit account the lender does what’s called a “hard inquiry” into your credit history and this inquiry dings your credit. You can lose quite a few points off your score from just one application, but usually one is easy to gain back.
However, if you apply for 5 cards at once, you’ll get a large ding to your score for each card which could lose you at least 100 points which is bonkers.
The second reason why you shouldn’t apply for a ton of credit at once is that you don’t want to throw yourself that deep into credit cards too quickly.
It’s really easy to fall into the trap of thinking that the credit you have is money available to you, which leads to maxed out credit cards and a ton of debt. Having a single card with less than $1000 worth of available credit is ideal for someone who’s just starting out.
9. always monitor your score
It’s extremely important that you keep up to date with the happenings of your credit score. You can take this information to see what actions are increasing or decreasing your score and also see if there are any discrepancies or identity theft issues happening.
You have a few options for monitoring your credit score:
- Get a Free Yearly Report: You are allowed to check your credit report once a year through each of the credit bureaus (i.e., TransUnion, Equifax) at no cost to you
- Use a Free Service (Credit Karma): There are a number of awesome websites out there that monitor your credit score for free, however, you need to take these numbers with a grain of salt because they are not quite 100% accurate. I use and LOVE credit karma, available in both the US and Canada!
How a Credit Score Works
Your credit score is calculated using 5 categories that make a different piece of the pie. Each category is worth a different percentage and will affect your score different. The categories are as follows:
- Payment History
- Total Amounts Owed
- Length of Credit History
- New Credit
- Types of Credit
Let’s dig a little deeper into each of these 5 categories so you can understand how they actually work:
This category is super straightforward and easy to understand. It takes into account whether or not you’ve paid your credit accounts on time & in full. It includes your on-time and late/missed payments, any collections that are against you currently, liens, bankruptcies, and foreclosures.
total amounts owed
This section is all about your credit utilization and the total amount of money that you currently owe on credit. Your credit utilization is a ratio of how much available credit you’re using versus how much total credit you have available to you. An example of this makes it a little more clear, if you have a credit account where you have $1,000 available to you and your current credit on the card is $950, you’ll have a 95% credit utilization and be seen less positively to creditors.
length of credit history
The longer the amount of time you have open credit accounts, the better. Since this blog post is focused on people who are 18, it’s going to be hard for you to have a good length of credit history, so don’t worry too much about this one.
This is a big reason why it’s super recommended to start using credit when you turn 18 and have the option to!
Every time you apply for a new credit card or credit account, there’s a hard inquiry on your credit score. Unfortunately, this means that every time you apply for a new credit account you’ll see a decrease in your credit score.
types of credit used
People who are going to eventually give you credit don’t want you to only have 10 credit accounts. They want you to look like a well-balanced potential creditor who can borrow in a responsible way. They prefer to see that you have different types of credit (i.e., mortgage, car loan, etc.).
As we discussed, a credit score is going to affect a lot of small aspects of your life over the next 50 years. It’s important to learn how to build credit at 18 and not wait until you’re 30 to start thinking about it! Thanks for reading!