How to Build Credit at 18

One of the most monumental milestones in a teenager’s life is getting a driver’s license. And from the moment you get it — or maybe even years in advance for the true car aficionados — you dream of the day you can purchase that coveted dream car. In order to get the most affordable payment, be approved for a loan and truly turn that dream into a reality, you must have good credit.

Your credit score (a number between 300 on the low end and 800 on the high end) signifies to lenders how trustworthy you are based on your credit history. Because building good credit takes time, it’s imperative to start building credit at a young age to help secure low-interest loans on mortgages, cars and other assets in the future. Below, we discuss six ways to build credit at 18, so you can set yourself up for financial success at a young age (and purchase that dream car sooner than later).

Key Factors That Affect Your Credit

There are a few distinct factors that are important to think about when building credit:

  1. Payment history: Paying bills on time is important for a multitude of reasons, from keeping interest rates low to establishing good credit. Payments that are 30 days late or more will negatively affect your credit.
  2. Credit utilization: This is the ratio of your outstanding credit card balance to your credit card limits. Low credit utilization is better because it shows that you’re only using a small amount of credit loaned to you. Try to use 30 percent or less of your available credit.
  3. Age of credit: The longer you’ve had credit, the better you’ll look to lenders. They want to see someone with an established credit history, which ties into your payment history and credit utilization.
  4. Debt: Your level of debt is 30 percent of your credit score, so carrying a good deal of debt can greatly affect your score and ability to get approved for loans in the future.
  5. Inquires: The number of inquiries contributes to 10 percent of your credit score, but it’s best to limit the number of credit applications for the best score. There are two types: Soft and hard inquiries.
  • A soft inquiry is when your credit is checked as part of a background check, typically by you or another person. This type of inquiry won’t affect your credit score.
  • A hard inquiry occurs when a financial institution checks your credit for a lending decision like a loan or mortgage. While you have to authorize hard inquiries, they can negatively affect your credit score if performed often.

Which factors affect credit?

6 Ways to Build Credit at 18

Even though it’s difficult to build credit when you don’t have various lines of credit, there are steps you can take to signify to lenders that you’ll be responsible with a loan. Utilize the tips below to begin building your credit as a teen.

1. Become an Authorized User

One of the most effective ways to start building credit at a young age is to become an authorized user on a friend or family’s account. The primary cardholder simply adds your name to the credit card account, and you are given the ability to make purchases with that card. Even if you don’t use the card, the account can still go onto your credit report and help build your credit score, as you benefit from the age of that account.

An authorized user is any persn who has permission to use a credit card account, but is not responsible for paying the bill.

It’s important to make sure the primary account holder has responsible financial habits. If they acquire too much debt or fail to make payments on time, this could damage both parties’ credit scores. You’ll also want to make sure the credit card company reports card activity for authorized users beforehand, otherwise you won’t benefit.

2. Take Out a (Small) Loan

While we don’t recommend taking on debt simply to build credit, if you have a valid reason to take out a small loan, it’s a helpful way to build on your short credit score history and prove that you can handle debt. However, if you do take out a loan, we recommend it be small — maybe a few thousand dollars — and you must make payments on time each month. This helps legitimize your case as a consumer who can make payments on time, and thus is a good credit risk.

Consider a Credit Builder Loan

A credit builder loan is an option offered by smaller financial institutions like credit unions and community banks. Because they are designed to help people who have bad or little to no credit, the amount borrowed is held in a bank account while you make payments and build credit. Once the loan is paid off, then you receive the money. For this reason, you need to prove you have income to afford the payments, so it’s safest to choose a low loan amount.

3. Open a Credit Card

Without any credit history whatsoever, it’s hard to qualify for a credit card, but there are a few options. If opening a credit card, the most important factor is making on-time, monthly payments to prove you are trustworthy to lenders. Below are a few credit card options to explore:

  • Unsecured credit cards: These are the most common type of credit cards. They don’t require a security deposit to be approved or to get your limit increased, but they usually present you with a credit limit based on your creditworthiness before you apply.
  • Secured credit cards: These require upfront security deposits to open, and that deposit typically equals your initial credit limit.
  • Student credit cards: If enrolled in school, this could be a viable option. These cards typically have low credit limits, but high interest rates for those that don’t pay on time. Often, they even offer incentives for good grades.

4. Make Payments on Time

One of the most important things you can do to build credit is to make timely payments, as payment history makes up 35 percent of your credit score. This is the case for every type of payment you have, from a cell phone service to car payment. You can stay on top of these by setting due date reminders on your phone, or taking it a step further and scheduling automatic payments each month. When building credit, your number one goal should be to never miss a payment.

Payment history makes up 35% of your credit score.

5. Regularly Check Your Score

We recommend monitoring your credit report and credit score regularly as this will help you better understand what will positively and negatively affect it, and, in turn, allow you to build better credit based on these findings. For example, did your credit drop a significant amount due to a missed payment? The best way to learn what affects your credit score is to continuously monitor and note when it goes up or down. This also helps to catch signs of theft if you notice any inconsistencies.

6. Don’t Get Too Zealous

While this goes without saying, it’s always a helpful reminder to pause and think about what you truly can and cannot afford. The more credit cards and loans that you open, the greater the risk of falling into debt and negatively affecting your score. As a young spender who is just starting out, we recommend managing just one credit card and/or small loan until you understand how things work. Starting small will help ensure that you don’t ruin your credit from the beginning, and have to retroactively go back and fix it. As time goes on, you can add other lines of credit into the mix and begin diversifying your credit profile.

While starting to build your credit may seem like a long and daunting task, there are ways you can begin establishing a positive credit history, even as young as 18. Utilize the above tips and continuously educate yourself on how to build credit so that you can purchase your dream car at an affordable rate sooner rather than later.

Posted in Credit 101
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