College students can begin to build credit at 18 by obtaining a student or secured credit card or becoming authorized users on their parent’s credit cards. Taking out a credit-builder or student loan can also assist with the credit-building process.
Credit is a critical aspect of growing up and staying financially responsible. College students with favorable credit scores will have an easier time applying for credit, obtaining insurance, and renting an apartment. But how can you build credit at 18 if you aren't sure where to start?
We'll explore the eight best ways to build credit, including credit cards for 18-year-olds and how to build credit without a credit card. Turning 18 is the beginning of financial independence for many individuals and by the end of our guide, you'll be ready to monitor your credit.
Table of contents:
- Learn About Credit and Its Importance
- Obtain a Student Credit Card
- Get a Secured Credit Card
- Become Authorized on a Parent’s Card
- Consider a Short-Term Credit-Builder Loan
- Take Out a Student Loan in College
- Follow Responsible Credit Building Habits
- Keep an Eye on Your Credit Report
1. Learn About Credit and Its Importance
Learning credit 101 is essential before launching into your credit adventure. While 18 is a great age to start, you’re never too early to learn the basics and prepare for your financial future. Credit is a system of trust that helps tell potential lenders that you have the history to repay them.
Your credit report is a detailed record of your credit history, providing lenders with details about your accounts, payment history, current debts, and more. Three credit bureaus assemble credit reports: Equifax®, Experian®, and TransUnion®.
Your credit score is a three-digit number that summarizes your creditworthiness for lenders. FICO® and VantageScore® are two standard scoring systems used to calculate this information. With a higher credit score, lenders perceive you as less of a credit risk, potentially providing better lending opportunities.
Financial Tip: Lenders will typically consider a good FICO score to be between 670 and 739. Anything over 800 is considered exceptional.
Why Is Building Credit Important?
Building credit is important because it will affect your access to financial products and services, including housing, insurance, and loans. Here are a few reasons why building your credit is critical to your financial health:
- Applying for lines of credit: Your credit will impact your ability to obtain credit for mortgages, auto, credit cards, and personal loans.
- Getting lower interest rates: Lenders may offer you loans with higher interest rates if you have a low credit score.
- Obtaining home utilities: Some utility services may check your credit, requiring lower scorers to pay potentially hefty deposits.
- Obtaining insurance: Your credit can affect your insurance premiums, forcing you to pay higher rates if your score is low.
- Renting an apartment: Landlords often check credit scores when evaluating rental applications, with a good score increasing your chances of securing housing.
2. Obtain a Student Credit Card
Student credit cards are ideal for 18-year-olds with limited credit history to begin building credit. These credit cards to build credit offer a lower limit and provide educational resources, helping you build history and responsibly manage your line of credit. You may need to showcase your proof of enrollment to receive a student credit card.
While student credit cards are excellent for building credit history and learning financial responsibility, it remains crucial to establish positive financial habits, such as limiting spending to 30% of your available credit. Like any credit card, a student card can lead to a risk of overspending and excessive debt.
3. Get a Secured Credit Card
A secured credit card is another option to help build your credit and does not require you to be a student. Secured lines of credit require a security deposit, which typically becomes your limit. Secured credit cards are a strong way to build credit for individuals with little or no established credit.
By using a secured credit card, you can help prove to lenders that you are less of a financial risk. Some issuers may allow you to ‘graduate’ to an unsecured credit card if you demonstrate good credit practices.
4. Become Authorized on a Parent’s Card
If a young adult isn't ready to take out a credit card in their name, a parent can add the child as an authorized user on their existing card. A parent will need to contact their bank to add an authorized user, providing the child with a credit card in their name linked to the parent's account.
Most credit card issuers and lenders will then report this payment history to credit bureaus, allowing younger individuals to begin building their credit. Remember: parents remain legally responsible for utilized credit, and adding an authorized user may affect your account; in these cases, the younger individual is not legally obligated to pay the debt.
5. Consider a Short-Term Credit-Builder Loan
A credit-builder loan helps individuals build their credit history with a reverse loan technique. When you open a credit-builder loan, the lender will hold a specific amount of money in a secured account, on which you will then make monthly payments over the loan's term. You will receive the funds once you have repaid the loan in full.
Credit-builder loans are not a way to acquire additional money; instead, they show lenders that you can maintain a reliable monthly payment schedule. The credit-builder loan lender reports the activity to the credit bureaus, enabling you to establish a positive credit history.
6. Take Out a Student Loan in College
Going to college and taking out a student loan in your name may help you build credit. Lenders report federal and private student loans to credit bureaus; on-time payments will contribute to your credit history. Additionally, student loans are a different type of loan known as installment loans; varying loan types can positively impact your score.
When taking out a student loan, ensure you only borrow the money you need and understand the repayment schedule. If you need to make your repayment schedule more manageable, consider options such as income-driven repayment plans. Note that student loans may impact your ability to take out other loans, such as mortgages or car loans.
7. Follow Responsible Credit Building Habits
As you work on building credit, it is critical to follow habits that encourage a healthy credit score and credit report for an 18-year-old. Paying on time is the most vital factor affecting your score, but here are a few factors you should be aware of when borrowing.
- Have a mix of credit types: Lines of credit come in different types, such as credit cards and installment loans. Positively managing multiple types of credit helps demonstrate stability to lenders.
- Make your payments on time: By making your payments on time, you heavily impact your credit and prove to lenders that you can responsibly pay back lines of credit. Keep on top of payment history with automatic payment schedules.
- Watch out for credit checks: When applying for a loan, they may make a hard credit check to see your financial history. Each of these checks can hurt your credit score, so try to keep them to a minimum.
- Monitor your credit utilization: The amount of available credit you use will also strongly impact your credit score. Keep the utilized amount of credit below $30%. For example, if you have a card with a $2000 limit, try not to use more than $600.
8. Keep an Eye on Your Credit Report
Lastly, monitor your credit report at all times. By monitoring your credit, you can catch potential errors, such as lines of credit that don't belong to you or payment errors. Monitoring can also alert you to identify theft by revealing fraudulent accounts or unamortized inquiries.
Familiarize yourself with the different parts of your credit report, including credit accounts and payment history. Knowing your score can help you negotiate favorable terms, such as lower interest rates, with lenders.
FAQ
At Credit.com, we know a thing or two about credit reports and scores. Here are some of the most frequently asked questions we've encountered about how to build your credit at 18 for a better financial future.
How Can You Get a Credit Score of 700 at 18?
Establishing a credit history using a secured or student credit card can help you achieve a high credit score at 18. A favorable credit report is not instantly obtained and builds up over time, so consistently practice responsible credit habits, and you can hit your dream score.
What Credit Scores Do 18-Year-Olds Start With?
Younger adults, like 18-year-olds, don't start with a credit score. If someone has never used credit, they won't have a score. Credit scores are built on credit history, and credit bureaus will start to generate one once a person has begun using credit.
Can an 18-Year-Old with No Credit Get a Loan?
Obtaining a loan with no credit is challenging at 18 or as an adult. Due to a lack of credit history, these individuals will be viewed as a higher credit risk. To obtain a loan at 18, the individual may want to consider a cosigner or begin with a small, short-term loan. Some small credit unions may be more likely to work with young adults with limited credit.
How Can You Prepare to Build Credit at 18?
Building credit is challenging if you are under 18, as you typically need to be at least that age to enter a credit agreement. However, you can take the time to learn more about financial responsibility and money management. However, some credit companies may allow a parent to add a child as an authorized user, which can help younger individuals begin building credit.
Stay in Control of Your Credit Report with Credit.com
The world of credit can feel overwhelming, leading many to ask how to build credit at 18. By assembling a credit history and considering options, such as a credit card to build credit, young adults can start building their financial future. Importantly, young adults should monitor their credit; obtain a free credit report card, and get started today.
