Becoming 18 is a significant milestone, marked by preparations for college, trade school, gap years, or job applications. It’s also when you start taking control of your finances, managing expenses like student loans, rent, and budgeting for the first time. You’ve likely heard about the importance of credit and how it can impact your financial future.
Building good credit is a gradual process, and starting at a young age is crucial for securing favorable interest rates on mortgages, cars, and other assets in the years ahead. Here, we’ll discuss seven strategies for building credit at 18, setting the stage for financial success in your early years.
Grasp the Fundamentals of Credit
Understanding credit may initially seem overwhelming, but it’s a lifelong learning journey. You don’t need to become an expert overnight. Credit health is a marathon, not a sprint. Start with the basics, focusing on key factors:
- Payment History: Timely bill payments are essential for maintaining low interest rates and establishing good credit. Late payments, especially those 30 days or more overdue, can have a negative impact.
- Credit Utilization: Aim for low credit utilization, which is the ratio of your credit card balance to your credit limit. Using 30% or less of your available credit is ideal.
- Age of Credit: Lenders prefer individuals with an established credit history. Your credit history’s length ties into payment history and credit utilization.
- Debt: Having substantial debt can affect your credit score and future loan approvals.
- Inquiries: Limit credit inquiries, both soft and hard. Soft inquiries have no impact, but hard inquiries, such as those for loans or mortgages, can negatively affect your score if done frequently.
Become an Authorized User
An effective way to initiate credit building at a young age is becoming an authorized user on a friend or family member’s credit account. The primary cardholder adds your name to the account, allowing you to make purchases. Even if you don’t use the card, the account’s age can benefit your credit report.
Ensure that the primary account holder practices responsible financial habits. Their overspending or late payments could harm both credit scores. Verify that the credit card company reports card activity for authorized users.
Consider Small Loans
While taking on debt solely for credit building isn’t recommended, a small loan, like a student loan, can help establish a short credit history and demonstrate responsible debt management. Keep the loan amount modest, make on-time monthly payments, and establish yourself as a trustworthy borrower.
Credit builder loans, offered by credit unions and community banks, are designed for individuals with limited or poor credit. The borrowed amount is held in a bank account as you make payments to build credit.
Explore Credit Card Options
Securing a credit card with no credit history can be challenging but not impossible. When opening a credit card, focus on making punctual monthly payments to prove your creditworthiness. Consider these options:
- Unsecured Credit Cards: These are common and don’t require a security deposit for approval or credit limit increases. Your creditworthiness before applying determines the limit.
- Secured Credit Cards: These require an upfront security deposit, often equal to the initial credit limit.
- Student Credit Cards: If you’re a student, these cards may be suitable. They typically offer lower credit limits and higher interest rates for late payments.
Prioritize Timely Payments
One of the most critical aspects of credit building is consistently making payments on time. Payment history constitutes 35% of your credit score, encompassing various payments like cell phone bills and car payments. Set reminders or automate payments to avoid missing due dates.
Monitor Your Credit Regularly
Frequent monitoring of your credit reports and credit score helps you understand factors that impact them positively or negatively. By noting changes in your score, you can learn how various financial decisions affect it and detect any signs of identity theft.
While building credit, be cautious not to overextend yourself. Avoid accumulating too many credit cards or loans, as this increases the risk of debt and can harm your credit score. Starting with one credit card or small loan allows you to grasp credit management fundamentals before diversifying your credit profile.
Building credit as an 18-year-old may appear challenging, but these strategies enable you to establish a positive credit history early on. Follow these tips, continuously educate yourself about credit building, and you’ll be on the path to securing favorable financial opportunities sooner than you think.
If you ever need expert assistance or guidance on your credit journey, don’t hesitate to reach out to the Nerds! Additionally, stay updated with the latest tips and information by following us on Facebook, Instagram and TikTok!