It’s never too early to start building credit. Growing your credit score at 18 will strengthen your score by the time you apply for loans. People who work on their finances at a young age can hit net worth goals sooner. Being young, you tend to have more time and fewer expenses. Your early years are optimal for building your wealth and learning about money. We’ll cover how to build your credit at 18 and why you should.
Why Your Credit Is Important
Your credit impacts essential purchases in your life. Lenders will assess your credit score before giving you financing for a home or car. Having a low credit score can block you from neighborhoods and car models. People with low credit have to compensate by making a higher down payment or settling with less. Some low-credit consumers hoping for a new car will have to buy an old car. This scenario happens because they may not get enough financing for a new vehicle, not necessarily because they want to save money on an older model.
A good credit score leads to more financing, but barely making the cut also has its consequences. Lenders look at your credit score to determine your ability to pay the debt. An applicant with a 700 credit score is less risky than an applicant with a 620 credit score, assuming everything else is equal. Applicants with lower credit scores get higher interest rates on their loans. A higher interest rate can add hundreds of dollars to your monthly expenses. Take out a mortgage and auto loan, and you could pay an extra $1,000/mo because of your credit score.
Your credit score will impact your expenses and opportunities even if you don’t use financing. Landlords review your credit score before letting you stay in one of their units. A low credit score can lead to a rejection or higher rent payments. Landlords and lenders want to collect more money upfront in case you can’t afford it in the future. Utility companies will also charge higher monthly payments or not provide services if you have a lower credit score.
What Is Credit Building?
Your credit score influences many areas of your life, but getting stressed isn’t the solution. Credit-building strategies will put you in a strong position when you’re ready to apply for loans or pay rent. Consumers consciously work toward a higher credit score instead of spending when necessary. Some people incur additional debt with the sole purpose of demonstrating quality payment history. Increasing your credit score leads to more attractive financing options and can give you more room in your budget.
Understanding The Basics Of Credit
The credit bureaus give you a credit score, but what goes into that number? We’ll discuss the basics of credit so you know what determines your score.
- Payment History: This category makes up 35% of your credit score. Making on-time payments on credit card debt, loans, and other obligations will strengthen your score. Late payments get reported and will hurt your score. Don’t take on more debt than you can afford, especially with your credit card.
- Length Of Credit History: Older accounts indicate experience. As your credit gets older, your credit history will grow. People resist closing their accounts primarily because of the credit score impact. Closing your oldest credit accounts can hurt your score, but keeping them open will improve your score as they age.
- Credit Utilization Ratio: This metric makes up 30% of your score and measures your current debt against your credit limit. If you owe $1,000 on your credit card and have a $2,000 credit limit, your utilization ratio is 50%. You can improve your ratio by paying debt or asking for a higher credit limit. It’s better to pay down debt and keep your credit utilization below 30%. While credit utilization ratios under 30% help your score, a utilization ratio below 10% is ideal.
- Debt: Your debt management skills significantly impact your credit score. Taking on debt and making on-time payments will strengthen your score. Falling behind can damage your credit. Calculate your monthly budget, and don’t let your monthly obligations exceed that number.
- New Lines Of Credit: New credit makes up 10% of your score. Requesting credit lines gives you more financing you can tap into at any moment. Unlike a loan, you don’t have to seek approval to use a line of credit. You can use it, pay it back, and immediately deploy it when it’s needed next. Your credit card is one of the many lines of credit you can obtain. You never pay interest until you borrow against the line of credit.
- Account Mix: Lenders like to see a mix of debt obligations on your account. If you can juggle a mortgage, auto loan, and other loans, it demonstrates you can handle multiple types of debt. You shouldn’t take out more loans for the sake of account mix.
- Inquiries: Lenders issue inquiries to obtain your credit report and access other details. They use this information to assess your loan application, and landlords will do the same for potential tenants. You can either get a soft inquiry or a hard inquiry. Soft inquiries do not impact your credit score. Hard inquiries will hurt your credit score by a few points and remain on your report for up to two years. Lenders will conduct a hard inquiry when reviewing your loan application. If you are applying for a mortgage or auto loan, you can expect a hard inquiry.
What Credit Score Do You Start With When You Are 18?
You don’t start with a credit score at 18. Credit bureaus will not automatically assign you a score once you reach adulthood. The credit bureaus only give you a score once you establish credit through a line of credit, loan, or another method. Your credit score can range from 300 to 850. Don’t get stressed if your credit score is lower than desired. You have plenty of time to build it up with a strong payment history, low credit utilization, and other strategies.
How to Start Building Credit At 18
Increasing your credit score by a few points can work wonders for your interest rates and monthly budget. In addition, building credit at 18 gives you more time to prepare for a loan, rent payment, and other costs. Here are some strategies you can consider to improve your credit score.
Take Out a Credit Builder Loan
A credit builder loan isn’t your typical loan. Borrowers take out these loans with the sole purpose of showing a strong payment history. The loan provider will report your payment history to the major credit bureaus, improving your score in the process.
Monitor Your Credit and Your Finances
The starting point of all improvement is tracking. Keeping an eye on your credit and finances will help you spot opportunities to improve your credit score. You’ll also avoid common pitfalls such as spending more than you can afford.
Take Out A Student Loan
Student loans open the doors to collegiate education. They also allow you to strengthen your payment history. However, student loan payments get reported to the credit bureaus and impact your score. So, while student loans can help your score, you should be prudent. Don’t wait until after graduating college to start paying off this loan.
Become An Authorized User
Becoming an authorized user of someone else’s credit card helps you piggyback on their payment history. Even if you don’t use this person’s credit card, their activity will appear in your credit history. A credit cardholder with a strong payment history will increase your credit score. However, becoming an authorized user of someone who makes late payments will hurt your score. Ensure the credit card company reports activity for authorized users, not just the primary cardholder. If the company does not report activity for authorized users, you won’t build credit from that card.
Get A Credit Card
Using someone else’s credit card activity to build your score can work, but not everyone knows someone with a reliable payment history. Even if you become an authorized user, you should get your own credit card. Consider a secured credit card if you can’t qualify for traditional credit cards. These cards work like bank accounts. Instead of a credit limit, you can only spend funds you put into the card.
Secured credit cards work similarly to debit cards. You can only use the funds in your checking account for a debit card. If you go over those funds, your purchase will be declined. You make an initial payment for your secured credit card, which becomes your credit limit.
Building up a payment history on a secured credit card will help you qualify for an unsecured credit card in the future (i.e., credit cards that let you use debt to finance everyday purchases). Do not close your secured credit card once you get an unsecured credit card. An unused secured credit card will help your score because of its age.
