If you’ve just turned 18… congratulations, you’re now officially an adult! And whether you’re feeling excited or anxious or both, it’s super smart to start thinking about how to start building credit at 18.
Your credit score is one of the most important numbers in your life. It is made up of just three digits, but throughout life it helps you take major financial steps, such as buying a car, applying for a job, starting a business, and so much more.
Experian, Equifax, and TransUnion are the top three credit reporting agencies. They keep track of all of your payment information, collecting it all together on your credit report. The data on your credit report is then used to calculate your credit score, which helps lenders and creditors determine your creditworthiness – meaning how much and on what terms they're prepared to lend money to you.
The Catch-22 of Credit is this: it takes credit to get credit. You can’t start building your credit and your credit score without taking on credit yourself.
So, how to start building credit at 18?
Here’s a good place to start: Find a co-signer. Find someone – a family member, a relative, or a close friend – who has good credit standing, and can vouch for you when you’re applying for a credit card or a rent apartment.
Once you have that established, here are some useful tips on how you can build your credit score:
- Open a student credit card, and make sure you do the legwork to be sure you're getting a credit card that has a low APR, has great pluses like points, and boasts higher approval odds.
- Get credit for paying rent. Use a data furnisher like LevelCredit to report your on-time rent payments to Experian, TransUnion and Equifax. That way you get credit for something you’d be doing anyways without taking on any debt.
- Make sure “alternative data” is reported to all three credit bureaus. This is information that speaks to your creditworthiness beyond the traditional sources to give a more holistic picture - to calculate your scores. On-time rent payments are just one example of alternative data, with other payments like utilities factor in, too.
- Become an authorized user on someone else's account (i.e.. your parents), but make sure they have good credit and consistent payments. And it's a win-win - your good behavior of on-time, consistent payments can also help boost their credit score, too.
- Be smart in managing your student loans. They are an important factor on the credit history you're building, so be sure to make on-time payments and take other positive, proactive steps over time as you manage it.
- Take out a credit-building loan. This is from a credit union or community bank, where the loan sits in a savings account, that you can then access once the loan term is up. This helps you both save money and build credit.
- Get in the habit of paying all your bills on time, including any rent or utilities.
- Open a secured credit card. This kind of credit card requires a deposit, which becomes your line of credit. Just be sure the credit card company reports this information to credit bureaus so you can benefit.
- Review a copy of your credit report on a regular basis to be sure you’re on the right track (and ensure there are no errors on your report). CreditKarma are a great option.
- Open one card at a time, and limit new accounts. Lenders and creditors look at this as evidence that you're not getting in over your head with too many new accounts, so this actually lowers your credit score.
- Keep an eye on your credit utilization. The trick is to keep your balance to no more than 30% of your card's credit limit to show you’re financially responsible.
- Plan to leave credit card accounts open. Once you open a credit card account, it's a good practice to leave it open, even if you don't use it. Having a card you use infrequently or never can actually lower your credit utilization ratio. The longer you have the card, the better, too.
- Fight any erroneous charges you see on your credit report. One of the best ways to spot identity theft and fraud is on your credit history. If you even have a credit history before you turn 18, there's a good chance you've been scammed. So stay vigilant and immediately report to credit bureaus any information you know to be false.
- Take care of large or late debts as soon as possible. While those late/missed payments and excessive debt will have a negative impact on your credit scores for as long as seven years, if you do your best to fix problems ASAP, their impact will decrease over time.
These are the basics of how to start building credit at 18. But there’s still a lot more to learn about credit building.
Starting to build credit at 18 is a very wise move. Keep learning as you go, and you will quickly gain an excellent credit score that opens up a brighter financial future.