Congratulations! You’re officially an adult. Turning 18 opens a world of possibilities and freedom, but it also comes with additional responsibilities. One important responsibility to start thinking about is building your credit profile.
Credit can be a critical resource. A good credit score helps you get approved for loans and credit cards. It also helps reduce the expense associated with your debts, as you’re more likely to get approved for lower interest rates if your credit is better.
Your credit score and history can also help—or hinder—you when you’re applying for certain types of employment, a new apartment, utilities, or auto insurance. Find out more about credit and how to build credit at 18 in the guide below.
You know that knowledge is power, and understanding how to get credit and how it all works can make a big difference. Here are a few basics.
Your Credit Score
There are multiple scoring models, but they all work to provide a numerical score that tells lenders how likely you are to pay back your debts. Higher credit scores are more attractive to lenders and creditors. Five main factors influence your score:
Payment history, which is whether you pay your bills on time
Account mix, which demonstrates that you can responsibly manage multiple types of accounts
Inquiries, which occur when you apply for new credit
Your Credit Report
Your credit reports are maintained by three major credit bureaus—Experian, TransUnion, and Equifax. They contain data on your current and past debts, payment history, residential history, and other information about your credit history. This data is supplied by lenders, creditors, and businesses where you have accounts. The information on these reports is fed into the credit scoring models to determine your credit score.
Here’s where it starts getting complex. The information on those reports isn’t always the same. Some businesses and lenders only report to one or two of the credit bureaus. Some don’t report to any.
So, your credit report can be a little different with each of the bureaus. That means your credit score can also vary depending on which report and scoring model is being used.
2. Monitor Your Credit Score and Reports
Once you understand some basics about credit, you should take a look at your own credit reports. Monitoring your credit is one of the best ways to learn what will positively or negatively impact your scores. It also helps you catch inaccuracies or signs of identity theft sooner. Is there an account on your report that’s not yours? It could be bringing your score down even before you learn how to start building credit! If you find inaccurate negative information on your credit report, you can challenge it.
There are a few ways to check your credit reports.
AnnualCreditReport: You can request one report per year from each of the three bureaus at AnnualCreditReport.com. The bureaus are allowing you to request your reports weekly due to the effects of coronavirus through April 2022.
Credit Report Card: You can also get information about your credit reports via the free Credit Report Card at Credit.com. This is a breakdown of how you’re doing with each of the five major factors that impact your credit score. Your personal Credit Report Card can help you understand where you might need to work to positively impact your credit.
ExtraCredit: If you’re really serious about understanding your credit reports and scores, sign up for ExtraCredit. The Track It feature lets you see 28 of your FICO® scores and credit reports from all three credit bureaus. These scores are ones that lenders look at when making approval decisions.
3. Sign Up for ExtraCredit
ExtraCredit does more than just show you your credit scores. Have you recently started paying rent or utilities? The Build It feature lets you add them as tradelines with the TransUnion and Equifax credit bureaus. That means you’ll get credit for bills you’re already paying—building your credit profile each month that you pay those bills.
This is important, because rent and utility payments don’t usually show up on credit reports. That’s simply because utility companies and landlords don’t tend to bother to report them. ExtraCredit helps you ensure you’re getting credit for those on-time payments anyway.
If a friend or family member has a credit card and is an account holder in good standing—meaning they pay their bills on time—ask if they’ll add you as an authorized user. Make sure that their credit card company reports to the credit bureaus for authorized users first or this is a pointless exercise.
You don’t even need a card or to use their account. If the credit card company reports on authorized users, you’ll get their on-time payments posted to your credit reports if your friend or family member makes them.
If you’re looking for how to start building credit at 18, this can be a quick method. However, it does come with some potential risk. If that person doesn’t pay on time or runs up their credit card balance, your credit score could suffer from the negative reports too.
5. Get a Starter Credit Card
For those who want to know how to start credit building without someone else, a secured credit card might be a good place to start. Some credit card companies also offer unsecured credit cards for those with no credit. These tend to have low credit limits and may have high interest rates.
If you can’t find an unsecured credit card, though, a secured card is much easier to get in general. You have to secure it with a deposit—typically in the amount of the credit limit. For example, if you put down a $250 security deposit, your initial credit limit is $250.
You build credit by using the card and paying the bill on time each month. Make sure you opt for a credit card that reports to all three of the bureaus to maximize the benefits to your credit history. Usually after a certain number of timely payments, you get your security deposit back and may even be eligible for an increase in credit limit.
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6. Apply for a Credit Builder Loan
Remember that credit mix is important to your credit score. That means you can’t just have one type of credit—such as a credit card—for maximum impact. You may also want an installment loan on your account.
A credit builder loan is one way to get an installment account on your credit history. These work like a traditional loan in reverse: if you’re approved, your funds get placed in a secured certificate of deposit and are given to you after you’ve paid off the loan.
As you pay the loan as agreed, you’ll enjoy the benefit of positive payment history building on your credit report. Once you pay off the loan, the savings account is unlocked and you gain access to the money.
7. Understand How Student Loans Can Help Your Credit
If you have a student loanin your name, you may already have an installment loan on your credit history. This is true whether your parents acted as guarantors or cosigners or not, but it’s not true if your parent simply took the loan out for you. In that case, the lender would only report on your parent’s credit history.
As with any type of debt, student loans can help you start building credit if you pay them on time. So make sure you keep up with your loan status. If you use options such as deferment—especially during COVID-19—keep an eye on your credit report. Make sure your lender doesn’t report you as paying late when you’re within an agreed-upon deferment period.
8. Don’t Try to Overdo It
Building credit is a marathon, not a 100-yard dash. While some actions can positively impact your credit quickly, as a young person you’re unlikely to have a super robust credit history in just a few months.
Take your time and don’t try to engage in every credit-building tactic at once. You certainly don’t want to max out your debt in an effort to build credit. That could leave you unable to make your payments, which tanks your credit score before you have time to really build it.
9. Make a Budget and Stick to It
Finally, make a budget and stick to it. Spend what you can afford, and don’t take on debts you can’t pay fairly easily. You have years to continue building your credit, and a history of smart decisions and timely payments is one of the best things for your score long-term.
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Building your credit at 18 is possible. It just takes time, commitment to making smart money decisions and an understanding of how credit works.
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