Having good credit is imperative to unlocking many financial opportunities in life. Among these advantages, you will see lower interest rates on car loans, credit cards, and mortgages. The key to getting that high credit score is to start building credit at a young age. That is why adults as young as 18 might want to consider getting a credit card to build their credit now, thus improving their credit score over time.
The Importance of Good Credit
As mentioned earlier, some of the advantages of having a good credit score are being able to qualify for better interest rates, as well as better rewards on credit cards. Many other reasons should cause you to shift some of your focus on your score and your financial future.
Your credit history is one of the first things a company will consider before offering you a loan or any type of credit. With a good credit score, you will have a much better chance for any credit and loan approvals. You will also have more negotiation power behind you, better car insurance rates, cell phone contracts that may not require a hefty security deposit, and it will prove to be even easier when it comes time to rent an apartment or house.
A poor or low credit score can affect you negatively when it comes to your financial health and future. You may continuously get denied credit and may even be considered a high-risk borrower which makes any institution that much more hesitant to help you out.
What is Considered a Good Credit Score?
Credit scores typically range between 300 and 850, so a credit score that hovers around the 700 mark is traditionally considered to be good. A score above 800 is considered excellent.
The average person’s credit score falls between 600 and 750 and offers some room for improvement, although it is not too bad; it still needs some work.
Types of Credit Scores
There are many different types of credit scores you can look at, but there are two very common ones that you should really pay attention to. FICO scores and scores by VantageScore are the two most common that you will come across.
FICO scores are used by several different lenders when they are determining your eligibility for a loan or other credit. If your FICO score falls above the 670 mark, then your credit appears to be in good standing. Anything over 800 is exceptional.
The VantageScore was developed by the three major credit companies which include Experian, Equifax, and TransUnion. Their scoring model has scores falling between 300 and 850 and considers anything above 700 to be good, and over 750 is exceptional.
What Affects My Credit Score?
One more thing to consider when learning about your credit score is being able to identify what will ultimately affect your score.
Depending on the model being used to calculate and rate your score, several factors can cause a negative or positive change in your credit.
Typically, your payment history for previous or current loans and credit cards along with the amount of credit cards and how many late payments you may or may not have will seriously affect your score.
How much credit you are utilizing will also affect the score. The credit utilization rate is your amount of revolving credit and how much you currently owe. Your credit utilization can affect up to thirty percent of your overall score, so you will want to keep this percentage down under the fifty percent mark. A good utilization rate, however, should fall under 30%.
Finally, the age of your credit and the accounts you have, along with total debt amounts, newly opened accounts, and the number of inquiries can also have an effect on a person’s credit score.
Credit scores are an important aspect of your financial responsibility and should never be overlooked. It is good to start as soon as eighteen to begin building up your positive credit.
Here are five steps you should consider when building credit as early as 18.
1. Build a Credit History
For your birthday this year, consider asking your parents if you can apply for a credit card and even have them help you fill out the application. You can build a solid credit history by limiting your use of the card and making payments on time every month.
Don’t use and abuse your card. Consider using this card for emergencies only. You may even want to use this card solely for gas. This way you won’t use up your limit or ever go into credit card debt.
It may also be beneficial for you to consider opening up a checking account at a bank or even a credit union if you haven’t already done so. The checking account will be needed to pay bills for the credit card you may get anyway, so you might as well start now to establish your credit history.
Benefits of a Credit Union Account
An account at a credit union may offer you far more benefits than an account at a traditional bank. A credit union is a non-profit organization and may be able to offer their customers lower fees and even lower rates.
A credit union will also always put their customers first and may be more willing to work with you, even if you find yourself in a difficult financial situation. They are usually very willing to work with you, even if you are in the process of building your credit and they will also be able to explain anything that they see may negatively affect you.
2. Pick the Card That’s Right for You
It can be hard to qualify for your first credit card on your own. In order to choose the best card for you, consider asking for a student credit card (if you are a student). This will be a credit card of your own and sometimes has features that allow your parents to oversee your spending.
These cards usually have a lower limit, but it will help you build your credit. Just be sure to make on-time payments and not spend too much on the card. Your amount of debt is an important part of your credit scores and spending more than 30% of your limit can have a negative impact.
Some student credit cards even offer students extra incentives such as rewards for earning good grades while in school.
Secured Credit Cards
Secured credit cards typically require some form of collateral or security deposit in the form of cash that will then become the credit line on the credit card. If you have $500 for a security deposit on the secured credit card, then your spending limit would be the $500 you were able to put into the account.
Even secured credit cards can work to help you build up a credit history as long as you use the card and then pay the bills on time. So, just like a standard credit card, you will only want to charge the amount you can afford to pay off right away.
If you fail to make the payments on a secured credit card, then the company that issued the card can then take your security deposit away from you, and this will have a very negative impact on your credit score.
3. Make Payments on Time
When paying the balance on your credit card, try to make sure it is always on time. Missed or late payments will lower your credit score and negatively affect your credit history.
Once you use your credit card, consider paying it off right away in addition to meeting your monthly, minimum payment. This way you will always have a low balance and will be well on your way to a great credit score.
If you can’t pay the balance in full, you will incur interest charges, so try not to spend more than you can afford to pay off. That’s a quick way to get into credit card debt. Always spend within your means and pay off your balances.
4. Look at Your Credit Report
The more you stay on top of your credit report, the better your credit history will be. Consider getting a copy of your credit report annually. You can also get two free credit scores, updated monthly, from Credit.com to track your progress as you build credit.
Monitoring your credit is one of the best ways to learn what will positively or negatively affect your scores. It will also help you identify any inaccuracies and allow you to catch identity theft much sooner.
Identity theft affects many people daily, and if it goes unnoticed, you may have to be held liable for whatever the thief does with your information. Identity theft includes someone stealing your name and address, credit card or bank account information, social security number, and even medical insurance account numbers.
Monitoring your credit will help control your credit and score and will allow you the opportunity to protect yourself more thoroughly against identity theft and other fraudulent activity.
5. Keep It Simple… for Now.
The more credit cards you open, the higher chance you have of falling into debt. Since you are opening a credit line as early as 18, it is important to play it safe until you get comfortable. Once you get the hang of things, then you may consider opening up another credit card to help you continue building your credit over time. Starting off, you should have only one or two credit cards open in your name; any more than that could spell disaster and you may find yourself drowning in credit card bills and frantically trying to find a way to catch up.
If you don’t want to open another credit card, your first car purchase is another opportunity to build credit by using a car loan. This will help you continue building your credit, and you should be proud of yourself for the day you get approved for your first loan. You did it on your own!
Your parents are also a good source of information if you are concerned about your credit or are unsure of how to handle it. Taking the time to learn more about your credit and how to build it up may take some time and patience, but it will definitely be worth it in the long run.
More on Credit Reports & Credit Scores:
- What’s a Good Credit Score?
- How to Get Your Free Annual Credit Report
- How Do I Dispute an Error on My Credit Report?