When you’re 18 years old the last thing on your mind is credit – we’ve been there. Keep in mind your credit score is what will lenders will use the rest of your life to know if you’re trustworthy enough based on your finances. The best start anyone can have is to build credit at 18 the right way and secure a financial future.
The two most important factors an 18 year old will need to understand are: Credit Utilization and Payment History. These two factors deal with 60% of your credit score, just shows how important they are – doesn’t it? A proper credit utilization rate should be under 30% at all times. The best way to insure you’re stay below utilization is to pay off your credit card balances each month. Is this difficult? Yep. That’s why managing your credit and usage is so critical.
There are a few main ways many 18 years olds use to build credit, they are: secured credit cards, authorized user on a credit card, cosign on a loan, student loans, or a credit-builder loan.
Secured Credit Card at 18
Credit cards are by far the best way to build credit – and probably the most accessible. You may have trouble qualifying for a top tier credit card with no history and that’s ok – Rome wasn’t built in a day. That’s why there are secured credit cars for 18 year olds. A secure credit card required a security deposit up front to open, it’s the banks way of making sure they get their money. The deposit is almost always the credit limit on the card. These cards are much easier to qualify for than a no deposit credit card.
To have the best chances at getting a secured credit card at 18 and improving your credit at 18 follow these guidelines:
- have verifiable income
- have a checking or savings account with liquid assets
- verify the secured card reports to the three bureaus
- pay off the balance each month and you’ll avoid interest charges
In our experience it took us about 6 months to have a sufficient credit score to apply for non-secure credit cards at 18. The best thing you can understand at 18 with credit is that it takes time.
Become an Authorized User on a Credit Card
This one is tricky and requires another user with good credit and an established credit history. Being 18 with no credit doesn’t really give you much in terms of credit history so teaming up with someone who does have some is very beneficial. You’ll be able to benefit from the age of their account and their prompt payments.
This is a good way to build credit because you’re not tied to the debt. The only downside is that not every credit card reports to three bureaus for authorized users so you will want to follow up with the bank before you sign up.
Cosign on a Loan at 18
While we don’t suggest taking out loans to build credit at 18 – it can be a valid way to build credit. You’re looking for someone who has established credit and good payment history to cosign on your loan, typically at 700+ credit score would be ideal. You’re probably lookin at an auto loan or a personal loan at this point. Keep in mind you’ll still need to have verifiable income as you may be the responsible party for payment, especially if the other doesn’t pay the monthly payment.
Get a Student Loan for College
We will repeat – we don’t advise running out and getting loans whether for college or otherwise as a proper way to build credit but they do build credit. A student loan is not the preferred way to build credit as most generally don’t report to the credit bureaus until after 6 months of recurring payments. The perks to getting a student loan is that it will help you build credit history and utilization rather than payment history. The easiest loans you can obtain would be federal student loans through the FAFSA. Keep in mind these loans should only be used to pay for your schooling. We do not advise taking out more than you need. You can also make payments while in school to offset interest when you start making payments.
Credit Builder Loan at 18
Taking out a credit builder loan at 18 can be pretty nerve wracking. The money you take on sits in an account and you’ll have access to it at the end of the loan term. Basically you’ll be making payments on a money you’ll be given in the future. You will need to have verifiable income to show you can afford the payments so always choose a low loan amount. The best way to take advantage of these is to stick with the low loan amount and pay it off as soon as you can to build credit payment history. The financial institution will report all your payments to the bank and you’ll have a long term savings account that helped you build credit. It’s a win in everyone’s boook.
The best advice we can give to an 18 year old building credit is to keep it simple and don’t overuse. The more credit cards or loans you get the faster you can fall into debt and that’s exactly what you don’t need at 18. You may not be thinking of your future entirely yet but when it comes to credit you should always have at least a 5 year plan.