How to Build Credit at 18 & Why To Get Started Early

Whether turning 18 years old brings back memories of a college experience, a backpacking trip in Europe or a first full-time job, it’s a milestone birthday that in many ways lives up to its reputation as an age of discovery.

Expanded social freedom. The right to vote. Maybe a first steady paycheck bringing more financial autonomy. It’s an exciting time.

It’s also a great time to learn how credit cards work and the influence they have on establishing good credit at a young age.

“New credit can be exciting to young credit card users, but it’s important that they remember it’s not free money,” Jennifer Doss, executive editor at CardRatings.com, said. “Any balances that remain unpaid at the end of a billing cycle will accumulate hefty interest charges, and it’s easy for people to quickly find themselves in debt.

“Cardholders should remember to only charge to their account what they can afford to pay off each month. And they should always make sure to make their payments on time.”

Learning to build credit early can be an important head start in establishing healthy money habits and setting financial goals that will serve you well over your lifetime.

Why Build Credit Early?

Birthday cards often remind us that at age 18 our whole lives are ahead of us.  Building credit doesn’t usually make the list of things you’ve been waiting to do but it’s one of life’s more important foundation blocks.

Building credit early can help establish a good credit score for life, provided, of course, your approach is fiscally responsible and you don’t run up debt you can’t pay back.

You may not be in the market for a mortgage or in need of a loan yet , but those dreams you hope to realize someday will almost certainly be boosted by a good credit score.

A good credit score built on a history, however brief, of paying back money you borrow is how you qualify for lower interest rates on mortgages, personal loans and auto loans.

When building credit, experts recommend taking a calculated approach based on understanding the basics of credit and how credit scores work.

“If you are seeking to build credit, ensure you do it slow and steady – it is not a race,” Joe Schmitz Jr., Founder and CEO of Peak Retirement Planning, said.

“It is not worth taking on high interest credit card debt in order to build a worthy credit score. ​Simple things such as having a credit card for daily purchases and paying it off at the end of each month will go a long way over time.”

Understanding the Basics of Credit

For the same reason you shouldn’t dive into a pool without knowing how deep it is, learning about credit scores, interest rates and credit reports – the main components in any understanding of credit – should happen before you apply for your first credit card.

There are three major credit bureaus in the U.S.: Equifax, Experian and TransUnion. These credit bureaus collect information about your personal credit history and credit usage. They assign a credit score assessing your risk as a borrower based on reported information.

You can get a free credit report (some things in life really are free) from each of the bureaus annually through AnnualCreditReport.com. It’s a good habit to get into early as you look to build credit.

Your credit report is an accounting of your payment history, open accounts, on-time and late payments and your outstanding balance. Not surprisingly, paying on time boosts your credit score while missing payments damages it.

One key factor in assessing an individual’s risk as a borrower, even one making on-time payments, is how much of the credit available to them they’re currently using.

Credit Utilization

Let’s say you have $1,000 in available credit and you owe $500 on purchases you made this month.

Credit utilization is based on dividing the total balance on your credit accounts by your total credit limit and multiplying by 100. So, your credit utilization rate in the above scenario is 50%.

Lenders prefer you use only 30% of your available credit. Go over that, and they might consider you a risk because of it.

Credit Score & Credit Reports

The FICO credit score model is the standard used by 90% of lenders, with scores ranging from 300 to 850. Your rating as a credit risk is based on five factors:

• Payment history (35%)
• Amount of debt owed (30%)
• Length of credit history (15%)
• Credit mix (10%)
• New credit (10%)

When you apply for a loan or credit card, lenders will check your credit score to assess you as a potential borrower.

Reviewing your credit report on a regular basis is a smart way to not only monitor your credit for accuracy and fraudulent activity but also to see how the different factors can affect your score, including applying for new cards or making late payments.

A track record of on-time payments and keeping a low debt balance are instrumental in establishing a good credit score.

Credit mix, one of the lesser factors, is an accounting of your various credit accounts (student loans, credit cards, car loans, etc.) A diverse credit account will positively affect your credit score.

Young people building credit should keep in mind that applying for several cards (new credit) can negatively impact a credit score especially if you don’t have a long payment history.

There’s not much a young person can do about the length of their credit history except get the earliest start possible on building good credit.

“At 18 a person is eligible to apply for credit,” Doss said. “Opening a new credit card and responsibly managing it is a great way to begin building credit.”

7 Ways to Build Credit at 18

The need to build credit early should not be confused with building credit quickly.

You can get a credit card without a payment history but managing that card smartly and making payments on time is the only way to build the kind of credit that eventually will help you get mortgages or car loans at better interest rates.

“One mistake people make is opening too many credit cards too quickly,” Susan Espinosa, the VP of Member Experience at Skyla Federal Credit Union, said. “While store offers and rewards are tempting, having multiple cards can make managing payments difficult and may lower your credit score.

“A more responsible approach is to stick to one or two credit cards, set a budget, and set up automated payments to ensure payments are made on time.”

There are a number of ways an individual can establish credit with no credit history and do so in a responsible way.

1. Become an Authorized User

Being an authorized user means you have permission to use a credit card that belongs to another person, usually your parent or a sibling. You can build good credit by making purchases as an authorized user, as long as the account holder makes on-time payments. If the account holder fails to pay on time or goes over the 30% credit utilization goal line, it has a negative effect on your credit.

“At 18, it can be wise for a person to apply for their own credit card,” Doss said. “There are many great options for people new to building credit, including secured and student credit cards.”

2. Get a Job to Establish a Foundation

Having a steady income won’t immediately boost your credit score but it’s a good indicator to lenders that you’re a reliable wage earner with some  means to pay back money loaned.

“It’s important that a cardholder has a reliable way to make their payments on time,” Doss said. “Otherwise, they’ll likely see their credit score tank.”

3. Open a Student or Secured Credit Card

Traditional credit cards are more difficult to qualify for if you don’t have much of a credit history.

Student credit cards are designed to fill that gap, geared as they are to help students and recent graduates build credit and manage their finances.

Likewise, a secured credit card can be a good option for individuals with little or no credit history. A secured credit card requires a cash deposit as collateral when opening an account. Think of it as a debit card but one that has the capacity to boost your credit score since your purchases are reported to a credit bureau.

4. Pay All Bills on Time or Automatically

There’s no better way to establish good credit than paying your bills on time. Late payments not only trigger fees and cost you more in interest, but they also negatively affect your credit score for as long as seven years.

You should vow to pay off your cards in full every month. One way to make that commitment is to sign up for autopay.

5. Keep Balances Low

Since credit utilization accounts for 30% of your credit score, it’s important to keep your balance low. That applies not only to your overall amount of unpaid credit card debt but to the balances you carry on each card.

A debt-to-credit ratio above 30% will affect the credit score of an individual in the early stages of building credit more than it will a person with an established credit history and a good credit score.

6. Pay More Than the Minimum Balance Each Month

You can avoid late payments simply by paying the minimum balance each month. But you should strive to pay off each card in full every month to keep your credit utilization low and not accrue costly interest.

Barring that, pay more than the minimum whenever possible. Some experts recommend the habit of making two payments per month to avoid carrying higher balances.

7. Get a Loan

Traditional loans, like traditional credit cards, are more difficult to come by for people with little or no credit history. A credit builder loan is typically for a smaller amount ($300-$1,000) and can help borrowers establish a history of on-time payments, thus boosting their credit score.

“Don’t borrow money just for the sake of building a credit score — that is a perpetual wheel,” Schmitz warned. “Going into debt just for the sake of building credit is not something I would ever recommend.”

Monitoring Your Credit Score

Monitoring your credit reports is a good habit whether you’re just starting to build credit, or you have a long and solid credit history. You can access your annual credit report for free to stay informed about any changes to your credit and help protect against fraud.

One benefit is tracking fraudulent activity, such as someone opening an account in your name. Another is simply furthering your understanding of how different factors affect your credit score.

When you apply for a loan or credit card, the lender will check your credit. That’s known as a hard inquiry and can temporarily lower your score. When you monitor your own credit report, that’s considered a soft inquiry and has little to no effect on your credit score.

Monitoring your credit report should be part of your overall financial well-being, along with other good financial habits that don’t involve credit cards and loans, such as smart budgeting and responsible spending habits.

“Building credit is useful when it comes to things such as buying a house, but you shouldn’t allow it to consume your financial future,” Schmitz said. “Having an emergency fund, and a stable financial foundation is more important than a credit score.”
Having all three is even better.