Though turning 18 may mark the beginning of adulthood, certain adult goals still seem far off: buying a house, getting a car, or taking out a loan. Yet even if you aren’t planning on owning a house of your own anytime soon, building the credit it requires to make these large purchases has to start at 18.
A positive credit history is not built overnight. That’s why building credit when you turn 18 is the best way to ensure you have the credit history you need when you need it. However, starting out trying to get credit with no history can feel like a paradox. Taking out a line of credit often requires a credit score to be approved at a favorable rate. How can you demonstrate creditworthiness with no prior history?
Thankfully there are ways designed to help young adults gain and build the credit they need to succeed in the world while getting more experience practicing smart financial habits.
1. Understand How Credit Is Built
The first step is having a solid grasp of what credit truly is. Your credit score is a representation of how trustworthy you are with borrowed money. The three major credit bureaus receive payment information from loans, credit cards, and sometimes bills, and uses that data to calculate your score. Here are the major factors that go into calculating your FICO credit score:
Payment History: Your record of on-time payments.
Age of Credit and Type of Credit: How long any lines of credit have been open, and what kind of credit they are, like credit cards or loans.
Credit Utilization Ratio: How much of your available credit you’re using as a portion of how much credit you have available.
Total Balances and Debt: The total amount that you owe across all lines of credit.
Recent Credit Inquiries: When a credit card company or loan servicer checks your credit history, this can be a hard inquiry. Fewer inquiries in a period of time demonstrate more responsible use of credit.
Available Credit: How much of your credit is unused.
2. Get Your First Credit Card
If possible, acquiring your own credit card will help you build your credit while practicing responsible credit card use. However, at 18, you probably won’t qualify for the majority of credit cards available to you. To avoid having too many recent hard inquiries, be strategic about the cards that you apply to:
Secured Credit Card: Unlike most credit cards, secured credit cards require a deposit that will act as your line of credit. They must be paid off in full each month, but over time with responsible use, you’ll be able to apply for a traditional unsecured credit card.
Student Credit Card: Credit card companies understand that just because you’re young, doesn’t mean you wouldn’t use credit wisely. If you’re enrolled in school, you may be able to apply for a student credit card. These cards usually come with higher interest rates and penalties, so make sure you shop around before committing to one.
3. Become an Authorized User
This is a simple avenue to building your credit if you can find someone to help you out. Becoming an authorized user on someone else’s credit card will allow you to make purchases and get positive history when they make payments on their card. However, if they miss a payment, it’s possible this could negatively impact your credit as well. Make sure you trust the person whose account you will be sharing.
4. Take out a Credit Builder Loan
A newer option available today are special loans designed specifically to help you build credit. These typically work by allowing you to make payments on your loan before giving you any money. Once you’ve already paid off the full amount of the loan, the bank or financial institution will disperse the funds to you. It may feel a bit like paying into a savings account, except that you must make your payments on time every month, or face penalties.
5. Take out a Student Loan
If you’re planning on attending college and need a little more funds to cover your expenses, a student loan may be the way to go. The plus side is that once you start repaying the loan, those payments will count towards a positive credit history. However, a student loan won’t do much for your credit score until then, so you shouldn’t take one out just for the sake of building credit.
6. Manage Your Credit Wisely
Some might say that the largest factor in building a positive credit history is time. Simply opening a credit card won’t improve your credit overnight, and taking out a loan you can’t afford to pay can set you even further back. To build credit, you should learn to manage your available credit well. Keep in mind the factors from our first step that make up your credit score. Use a monthly payment calculator to determine your payoff schedule, make payments on time, keep balances low, and check up on your credit score and credit report yearly to catch errors or fraud.