How to Build Credit At 18

Have you just turned 18? Congratulations! You’re at a point when you have to start making big decisions. In time, you have to start building a life towards independence. Managing your finances and learning different financing options is also something that you need to get accustomed to. But enjoying these options is only possible if you have a good credit report. Therefore, you need to build credit at 18 to gain some financial freedom, become independent, and enjoy the benefits that financial institutions provide to people to secure homes and cars. Read on to get an idea of why you need to build credit at 18 and how. In addition, you will learn some challenges and the solutions you will experience along the way.

Why do You Need to Build Credit at 18?

Building credit early in your life can provide a plethora of benefits. Strong and positive credit history has a great impact on an individual’s life beyond just getting a credit card or a loan.

For example, if you want to move out of your parent’s house, you’ll need to qualify for cellphone service, utility services, an apartment, or other things that require a good credit report. When you have a positive credit history, the homeowner will be more likely to give their house on rent. You might also get favorable renting requirements like lower security deposits.

Now that you’ve turned 18, you must surely want your own means of transport to get to work or school. For this, you will need to finance a car. This can only happen when you have established credit. It will help qualify for the loan, get lower interest rates, and affordable down payment.

Besides that, some employers also check people’s credit history before hiring them. Your credit record helps them understand how responsible you are and how willing you are to fulfill your promises. The better your credit history, the more likely they will lend you a job. Of course, you need to establish your credit before applying for your dream job.

As you can see, building credit is a step towards becoming fully independent. However, there is one legal barrier that might come your way when trying to establish credit at 18. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act is a federal law that prevents people under 21 from getting a credit card without proving their ability to repay the debt pr consigner. Apply for one or two credit cards, and ask your family member or friends to cosign. You can also ask them to add you as an unauthorized user if they have a good credit history. It’s the best way to get started.

Understand the Basic of Credit

If you’re new to the concept of credit scores, try understanding the basics before anything else. Understanding the topic, at least on a surface level, not only helps build credit at 18 but also helps you avoid debt and credit problems in the future.

Three major credit bureaus build, manage, and maintain your credit report: TransUnion, Equifax, and Experian. Note that each bureau will generate separate reports and have nothing to do with each other. But they look for the same factors to maintain your credit report and calculate your credit score. Also, they use different score models like FICO and VantageScore 3.0, to determine your credit score.

The factors that play an important part to decide your VantageScore 3.0 credit score are:

• credit history
• payment history
• credit usage
• recent credit
• total balances
• available credit

The key factors that help to calculate your FICO score are:

• credit utilization
• payment history
• new credit
• credit mix
• length of credit history

Once you get a credit card, these factors will change throughout your life. Also, you can check your credit report to know which factor is preventing you from improving your score. Each credit bureau allows you to get a free credit report once a year. Use that as your guide and try to improve your score.

Keep in mind that credit, property, loan, and other lenders can use any credit report from all three bureaus. So, it’s better to check all of them. Moreover, a lender will use these reports to determine your interest rates, loan amount, eligibility requirements, and loan duration. A good to excellent score will help things turn out in your favor, while a bad score will make it impossible, often, to secure a loan.

How to Build Credit at 18?

Want to build credit at 18? Well, it looks challenging and impossible, but with the right techniques and clever practices, you can easily build credit in less time. Here are a few easy and simple options that you can choose. Make sure to practice as many of these techniques as possible to ensure you build your credit score and history.

Become an Authorized User

We have already discussed the importance of becoming an authorized user; let’s get into its details. The lender might not provide you a loan because of your age, making it impossible to build credit at 18. Even if you get the credit, you will have a thin credit file to manage to build a good credit report. Becoming an authorized user of your friend’s or family member’s credit card will allow you to benefit from their well-built credit. However, you need to make sure that the person you choose has a good credit report and responsible financial habits.

You don’t need to use their card also to become an authorized user. They can use their card without any problems and you can be an authorized user without making any purchases. Also, before you ask them to do this for you, ask them whether their card lender reports to all three major credit bureaus.

This is important, as you need to build a credit history in each bureau. If their credit card lender doesn’t practice this, ask your other friends or family members to help you.

Get a Card Builder Loan

This is another amazing option for adults who’ve turned 18, or even if you’re younger. That’s because there’s no age limit on this approach. You can opt for this at any stage of your life if you want to start building your credit. Typically, borrowers can apply for card builder loans from community banks and credit unions. But some online lenders might offer you these types of loans.

When you get a credit-builder loan, your borrowed money stays in your savings account. Also, you can only access the account at the end of the loan term. To apply for this loan, you need to meet certain criteria. But most importantly, borrowers are required to prove their income source. This indicates that they can afford the loan. Therefore, choose the loan amount carefully by considering your budget and ability to meet requirements.

Since you will make monthly payments on time, your chosen financial institution will report this activity to credit bureaus. When you will reach the end of the loan term, you will have an excellent credit report as well as some money saved. So, if you can afford to take out a credit-builder loan, use it as a method to start building credit at 18.

Open a Secured Credit Card

This option is ideal for people who don’t want to go for the authorized user option. The added benefit is that you won’t be dependent on anyone in this case. A secured credit card is different from a conventional credit card. An individual applying for this card has to pay a security deposit to open a credit line. Also, the amount you choose to deposit will become your credit limit. Hence, this is the maximum amount you can take out from your credit card. The pros of this method are that you have a higher chance of getting your application approved. Since you will be paying the deposit, your lender will have no problem issuing you the loan, even if you don’t have a credit history.

Make Timely Payments

If you repay the loan back on time, you will receive your deposit back and then you can cancel the card. But borrowers who fail to pay the card bill on time might lose some of their security deposit. You should only choose this technique if you can fulfill the commitment. Besides that, this option will only work if you have enough money for the deposit. Borrowers who pay for the credit card on time can build a good credit report, resulting in significant financial benefits.

Note that 35% of your FICO score depends on your payment history. So, it’s vital to pay your bills on time. This rule not only covers loans and credit, but also your other bills. Paying your bills before their due date will help you build credit at 18. This is the easiest thing you can do to maintain good credit history.

If you fail to make timely regular payments, not only will you accumulate debts, but you also allow lenders and companies to report late payments to the credit bureaus. Unfortunately, this information just doesn’t go away from your record but stays on your report for seven years. Throughout this period, it will continue to impact your credit score. The simplest way to prevent this problem is to automate your payments.

Get a Loan

Taking out any personal, student, or car loan is a great option to build credit au 18. This is because you will start to make real differences in your credit report as you make payments. But only opt for loans that you solely need, instead of getting a loan only for the sake of building credit.

Also, to aquire different kinds of loans. For instance, if you want to continue your education and need a student loan, choose between refinancing, federal, or private loans- whatever suits you the most. All of these loans will appear on your credit report and eventually contribute to your credit report.

We suggest people apply for federal loans first, as they come with borrower protection policies, like forgiveness programs and income-driven repayment plans. They don’t opt for a credit check, which saves you from hard inquiries. Whatever loan you choose, try comparing your options and ask for financial advice to make an informed decision.

Keep Your Balance Low

This is more important for an individual who has taken out a secured credit card. The credit utilization ratio is one of the most important factors that impact your score. It refers to the amount you owe compared to your credit card limit. For instance, if you are using half of your credit card, then your credit card utilization ratio will be 50%. The more you use, the higher your percentage will be, which credit bureau will record in their data.

To prevent the credit utilization rate from impacting your score, don’t use more than 30% of your limits. Generally, it’s best to keep the figure at around 10%. Another thing you can do is to pay off your balance monthly on time. This way, you will lower your utilization rate and interest rates.

Bottom Line

So, start building your credit form today and opt for a method that is approachable and easy for you. Open a secured credit account, take out a student loan, apply for the card builder loan, or ask your family to make you an authorized user of their credit card. All the aforementioned ways will help you build credit at 18 without burdening yourself with a loan at a very young age.

If you are still confused, you can consult a financial expert who can help you practice the above-mentioned methods. They will also analyze your situation and your goals to offer the the best possible options. At Credit Follows, our team helps young adults to maintain their credit history with safe and effective methods. You can simply contact us, and let us support you through the process until you achieve your goals.