How to Build Credit at 18

In a nutshell, credit is your financial track record. Your credit report contains a detailed history of your credit accounts and payment history. Lenders and some landlords review your credit report to decide if they’ll approve you for loans, credit cards, or apartments.

When you take out a loan or use a credit card, your lender typically reports your payments to the three major credit bureaus – Equifax, Experian, and TransUnion. Making on-time payments builds a positive credit history that boosts your credit score, while late payments drag it down.

What is a credit score?

Your credit score is a three-digit number ranging from 300 to 850 that’s based on the information in your credit report. Higher scores signal to lenders that you’re trustworthy with credit, while lower scores suggest that you’re a risky candidate for a loan or credit card.

FICO^®, a type of credit score that many lenders rely on, calculates your score based on five key factors:

• Payment history: This is whether you pay bills on time, and it makes up 35% of your score.
• Amounts owed, or credit utilization: This is how much of your available credit you’re using, and it accounts for 30% of your score.
• Length of credit history: This refers to how long you’ve had credit accounts, making up 15% of your score.
• Credit mix: This is the variety of credit types you have, like cards and loans, and it influences 10% of your score.
• New credit: This factor looks at your recent credit applications and accounts, contributing to 10% of your score.

If you’re new to credit, you may not have a credit score yet. It typically takes at least six months to generate your score after you take out your first loan or credit card.

The sooner you start building credit as a beginner, the earlier you can unlock the perks of good credit. Starting at 18 helps you avoid becoming ‘credit invisible‘ – someone with no credit history or too little history to generate a score.

Building credit at 18 unlocks benefits both now and in your future:

• Lower interest rates: With better rates, you could save thousands on mortgages, personal loans, and auto loans over your lifetime.
• Apartment approval: Landlords often review your credit before approving a rental application.
• Cheaper insurance: Auto and home insurance companies generally offer better rates to people with good credit.
• Job opportunities: Some employers check credit history during the hiring process.

Given the financial benefits of having good credit, it’s wise to start building credit early. Here are six ways you can get started at age 18.

1. Open a student or secured credit card

If you’re a student, consider applying for a student credit card. These cards help you build credit with minimal or no credit history, though they often come with relatively low credit limits.

Another option is a secured credit card. You’ll put down a cash deposit that establishes your credit limit, and you get that deposit back when you close the card with a zero balance.

2. Get a credit builder loan

A credit builder loan works differently than a traditional loan. Instead of receiving money upfront, you make monthly payments that the lender deposits into a savings or certificate of deposit (CD) account. Once you finish paying, the lender gives you the full loan amount back minus any fees.

The lender reports your payments to the credit bureaus along the way. This can help you build credit, as long as you pay on time.

3. Become an authorized user

If you have a parent or family member with excellent credit, ask them to add you as an authorized user on one of their credit cards. The credit card company then reports the card’s payment history to credit bureaus under your name, which can boost your score – but if the primary cardholder misses payments, it could hurt your credit too.

4. Pay all of your bills on time

Payment history accounts for 35% of your credit score, making it the most important factor. Set up autopay to pay your bills on time automatically, but make sure you have enough money in your account to avoid overdraft fees.

5. Check your credit score and credit reports

You can check your credit score for free through many credit-tracking websites, including myFICO.com, or your bank’s app.

You can also order your full credit reports from all three bureaus weekly at AnnualCreditReport.com. Your credit reports won’t contain your score, but it will give you a bird’s-eye view of your accounts.

Monitor your report for errors – if you spot any, dispute them with the credit bureau.

6. Keep your credit utilization low

Your credit utilization ratio – how much of your available credit you’re using – is the second most important scoring factor. You can calculate it by dividing your balance by your credit limit.

For example, a $300 balance on a $1,000 limit equals 30% utilization. Keep your credit utilization below 30% for a healthy score, though closer to 0% is even better.

Here are some mistakes to avoid along your credit-building journey.

• Overspending: Only borrow what you can afford to repay on time – missed payments can severely damage your score.
• Applying too often: Each credit application triggers a hard credit check that temporarily lowers your score. Aim to space out applications by at least six months.
• Maxing out cards: High balances hurt your credit utilization ratio. Keep your balances below 30% of your total credit limit.
• Missing payments: Lenders report a payment to credit bureaus once it’s 30 days late, and that late payment stays on your report for seven years.

Building credit at 18 gives you a head start on lower borrowing costs and better financial opportunities throughout your life. Focus on paying loans and credit cards on time, keeping your credit card balances low, and checking your progress regularly.

For more strategies, check out our guide on how to build credit without a credit card.