At 18, many people look forward to opening a credit account and learning how to start building credit score.
A good credit score has many benefits, but most credit newbies may be apprehensive about achieving it.
Here, how to build credit is made easier if you follow the six strategies mentioned.
Most common tips on how to start building credit at 18
1. Understand The Basics of Credit Scores and Credit Reports
Credit scores are decided based on the information recorded on your credit reports. Understanding how credit scores and credit reports work is crucial in learning how to build credit.
Credit Scores
A credit score is a number, which helps loan lenders get an idea of a borrower’s creditworthiness. The greater the credit score, the greater the chances qualify for a loan with favorable terms.
Lenders use the FICO credit score model to help them make accurate, reliable decisions when reviewing loan applications.
The credit scores are calculated based on the weighted factors listed below.
- Payment history (35%): The payment history assessment is made by reviewing the borrower’s overall record of making payments on time and general financial responsibility.
- The total amount of debt (30%): Concerns your total debt amount, mainly the percentage it represents relative to the maximum credit available. Lenders opt for a credit utilization rate of 30% or less.
- Length of credit history (15%): Applicants with an established credit history that indicates a sustained financial responsibility spanning several years are more likely to get approved for loans.
- Credit mix (10%): Lenders favor borrowers with multiple types of credit accounts, for example, credit cards, mortgage loans, installment loans, and personal loans.
- New credit (10%): In most lenders’ eyes, borrowers applying for or creating new credit accounts are a risky lot. Some applications for new credit lead to a “hard inquiry” notation that stays in a credit report for two years.
Credit Reports
Credit reports are like financial report cards – giving lenders a brief overview of your payment history, outstanding balances, and a list of credit accounts.
Positive remarks on your credit report, like timely payment history, can build your credit, while negative remarks like untimely payment history can damage it.
2. Become an authorized user
Being 18 doesn’t directly impact your credit score; it just means you will hold a thin credit file. That is why becoming an authorized user on another person’s credit card is so crucial in helping build credit.
Authorized users can make purchases using the owner’s card but do not bear any liability.
If the primary owner adding you has a positive payment history, it will appear on your credit report. it will be of great help in improving your credit score. However, if the primary owner has a poor credit history, it could also affect your credit.
But before being added, ask the primary owner to ensure the credit card company reports activity for authorized users by the three main credit bureaus, or else you will not build credit.
3. Get A Secured Credit Card Or A No-Deposit Credit Card.
Do you want to be responsible for your credit card and learn how to start building credit at 18? Opt for a secured credit card, then.
Most consumers seeking a secured credit card lack credit at all or hold a poor credit history.
Secured credit cards require the applicant to make a deposit – typically $200 to $500 – that becomes the applicant’s credit limit.
Compared to traditional unsecured credit cards, secured cards are easier to acquire, given you make a deposit. But, to qualify, you’ll need a source of income and a savings account, depending on your lender.
If you repay amounts borrowed on time, you can receive your deposit when the card is closed. However, failure to pay bills on time could put your deposit at a risk of being taken by lender.
You can also look for alternative credit cards that don’t require security deposits.
4. Take Out a Credit-Builder Loan.
Credit-builder loans are specifically designed to assist people with little or no credit history in building credit. This loan doesn’t need you to have good credit to qualify.
A credit-builder loan keeps the borrowed amount in a bank account as you make payments. Usually, you can’t access the money until you repay the loan entirely, meaning you build credit and savings simultaneously
It also cushions lenders dealing with inexperienced credit card holders or those with poor credit scores.
Credit-builder loans are an excellent choice for learning how to start building credit at 18, but may not be suitable for people with existing loan debts.
However, an analysis conducted by the Consumer Financial Protection Bureau in 2020 determined that “consumers without existing debt saw a credit score increase of 60 points more than consumers with existing debt.”
5. Get a Student Loan
Like other lending activities, student loans too appear on credit reports and affect the credit score. The repayment time set to present an opportunity to build your credit history.
There are three types of student loans: private, refinance, and federal loans – all of them appear on credit reports and influence the final score.
Take out federal loans first as they contain favorable borrower protections, such as income-driven repayment plans. Most don’t check credit. Fill the FAFSA to apply.
However, most student need a co-signer approval to get private student loans. It will appear on both the student’s and the co-signers’ credit reports.
After you graduate, consider refinancing student loans. Refinancing is beneficial because you could get a lower interest rate or a lower monthly payment. To acquire it, you require a credit score of 690 or more.
With refinancing loans, you can also bundle multiple loans into a single account, which can help your credit score as you will have decreased the number of accounts with balances.
6. Make Your Payments In Time.
Payment history makes up 35% of the FICO score, so its importance on building credit need not to repeated.
It means paying all your bills without exception and in time. Also, risking being reported by your credit company to the three main credit bureaus for late payment.
Late payment by 30 days is one of the major causes of low credit scores and negative credit reports.
Final Thoughts
When joining adulthood, accessing credit can be challenging because of a lack of credit history.
The issue of how to start building credit at 18 will be solved if you follow steps mentioned in this article.
Remember, being timely with payments and maintaining a low credit utilization ratio are two of the most vital things to consider to build credit.
A good credit score can’t achieved overnight, but developing correct habits can save you a lot of money in your life.