A good credit score can help you save a lot of money in interest and fees. But when you first become an adult, it’s likely you have minimal or no credit history. This means you might have trouble qualifying for a loan or renting out an apartment without a co-signer. To qualify for a loan by yourself or improve your chances of getting lower interest rates, you should take some time to learn how to build credit at 18.
We’ll cover the basics of how credit scores and reports work and give you some tips on how to establish your credit.
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1. Learn the Basics of Credit Scores & Reports
Your credit score is calculated based on the information listed in your credit reports. Understanding how both work is the first step to learning how to build and maintain your credit.
Credit Scores
Your credit score is a three-digit number lenders use to determine how risky of a borrower you may be. The higher your score, the more likely you are to qualify for the best interest rates and loan terms. Lenders often use the FICO credit scoring model when reviewing your loan application. The most popular version of this model has a scoring system that ranges from 350 to 850. Your score is calculated based on the five factors below.
Payment history and the amount of debt you owe—or your credit utilization ratio—are the most important credit factors, making up 65% of your score. When building credit at 18, keep in mind that having a positive payment history and low debt balance can help you improve your score and gain access to credit in the future.
Behind those two credit factors, the length of your credit history accounts for 15% of your score—the average age of your credit accounts—and is the third most important factor. Your credit mix takes into account the different types of credit accounts you have (student loans, personal loans, credit cards, etc.). The last factor, new credit, factors in how many times you’ve applied for access to credit recently.
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Credit Reports
A credit report is your financial report card—it gives the lender a summary of your payment history, list of credit accounts and your outstanding balances. While positive payment history on credit accounts can improve your credit, negative payment history can damage it. For example, a payment that is over 30 days late is usually reported to one of the three major credit bureaus—Experian, Transunion or Equifax.
When a late payment shows up on your credit report, a lender might consider you a riskier borrower. Negative remarks can remain on your report for up to seven years, but their impact lessens over time.
2. Check Your Credit Score & Report
To keep track of your progress, you’ll need to check your credit score and credit reports. You can check your credit score for free using a free credit score website or through your credit card provider.
Additionally, you can check each of your credit reports for free at AnnualCreditReport.com. Normally, you can only check it for free once per year. However, due to Covid-19, you can get free weekly credit reports through April 20, 2022.
When you check your credit reports, confirm that the information is accurate and complete. Be sure to check all of your reports because lenders might not report information to all three credit bureaus. If the information listed in one of your reports is inaccurate or incomplete, dispute it with the credit bureau that has it on your report.
3. Become an Authorized User
One way to add payment history to your report is to ask someone who has good credit history to add you as an authorized user on their credit card. When they add you, if their positive payment history is added to your credit report, it could improve your credit score.
However, the downside to this strategy is that if the person who lists you as an authorized user makes a late payment, it could negatively impact your score.
4. Open a Secured Credit Card
If you want to be responsible for your own credit card, choose to open a secured credit card instead. A secured credit card is a card that requires a security deposit in exchange for opening a credit line. The amount you deposit becomes your credit limit—the maximum amount you can charge. Since you’re making a deposit, a lender is more likely to approve your application if you have minimal or no credit history.
As long as you repay the amount you borrow on time, you’ll typically get your deposit back when you cancel the card. However, if you fail to pay your credit card bill on time, you’ll risk having your security deposit taken by the lender.
Read More: Best Secured Credit Cards
5. Make Timely Payments
Since payment history accounts for 35% of your FICO score, it’s important to pay your bills on time. This means paying all of your bills, not just your credit accounts, on time each month. If you fail to pay your bills, you risk a company reporting a late payment to the three major credit bureaus.
Once a company reports a late payment, it can negatively impact your score for up to seven years. To avoid this, enroll in autopay. You can still check your accounts monthly to make sure the right amount is debited if you fear being overcharged.
6. Keep Your Credit Card Balances Low
To improve your score, keep your credit utilization—the amount of credit you use in comparison to your credit limits—low. The general rule of thumb is to keep your credit utilization rate below 30%. This means if your credit card limit is $1,000, try not to borrow more than $300 at a time.
If your credit utilization becomes too high, this can negatively impact your credit score because the amount you owe accounts for 30% of your score.
7. Get a Loan
If you get a student loan, personal loan or car loan and repay it on time, this can help you build credit. However, if you don’t need a loan, don’t take out those types of loans for the sole purpose of building credit. Instead, take out a credit-builder loan. A credit-builder loan is designed specifically to help you build credit.
Instead of receiving loan proceeds and repaying the balance over time, you’ll deposit a certain amount of money into an account each month. At the end of your loan term, you’ll get your money sometimes with interest paid, minus fees.
Although credit-builder loans are less common than traditional loans, you may find them at your local credit union or an online lending marketplace.
Bottom Line
When you first become an adult, gaining access to credit can be a challenge due to a lack of credit history. To solve this problem, take some of the steps above to start building credit at 18. Remember that paying your bills on time and keeping your credit utilization ratio low are two of the most important things you can do to build credit. Though you won’t build a good credit score overnight, adopting good credit habits now can save you thousands of dollars during your lifetime.
