When you turn 18, you may find there are a lot of things you can do. You can vote, join the military, buy a lottery ticket, or get a tattoo. You can also open your own credit card.
But before you open a credit card, it’s important to understand how credit works. Learn more with these 7 tips on how to build credit when you’re 18.
What is a credit score?
A credit score is a number between 300 and 850 that creditors (think: banks and other financial companies) use to understand how risky it is to lend you money or issue you credit. Generally, the lower your credit score, the riskier you appear as a borrower. The higher your credit score, the safer you seem.
“Your credit score represents the likelihood that you will repay your loans (such as credit cards, mortgage, and auto payments) on time and in full," says Aliya Padamsee, Director of Financial Solutions at Fidelity. "Credit scores are a big factor that creditors and lenders use when deciding whether to approve you for a new credit card account or loan, as well as what interest rates and terms to offer. The higher your credit score, the better."
If you have a higher credit score, it’s usually because of responsible credit behavior. Future lenders may have confidence in your ability to repay debt. Higher credit scores can also lead to more favorable credit terms for a loan or a line of credit, like lower interest payments.
What goes into a credit score?
Credit bureaus generally calculate your credit score based on 5 factors. Each factor has a different weight to it. The factors are:
- Payment history 35%
- Credit utilization (amounts owed) 30%
- Length of credit history 15%
- New credit 10%
- Credit mix (types of credit used) 10%
“Each of these factors is important,” says Padamsee. “But your payment history is especially important, and in most cases makes up the greatest percentage of your score. Missed or late payments will hurt your score.”
How to build credit at 18
Consider these 7 tips to start building your credit when you turn 18.
1. Become an authorized user on someone else’s credit card
When you’re an authorized user, it means you’re added to someone else’s credit card account–often a parent’s. As an authorized user, you’ll receive your own credit card which you can use to make purchases. The primary cardholder (usually the parent) is responsible for making any payments. Many credit cards allow authorized users to be as young as 13 years old.
Here’s the thing: who you choose matters. Their credit habits can affect your credit too. So, if your parent has a solid track record with managing their card, it could be a great way to start building your own credit history. Just make sure to talk openly about how the card will be used and what everyone expects before you agree to become an authorized user.
2. Open a secured credit card
Many banks and lenders offer products that are specifically designed for people with little-to-no credit history. This can be an option to consider when you turn 18.
A secured credit card is like a regular credit card, with one big difference. When you open a secured credit card, you’ll pay a security deposit. This deposit usually becomes your credit limit. (For example, if you put down a $250 security deposit, you will most likely have a $250 credit limit.)
A security deposit can potentially improve your creditworthiness in the eyes of lenders. You may be more likely to be approved when opening an account, even if you have no credit history. And by using the card responsibly—keeping your balance low and always making your payments on time—you can start building your credit.
It’s important to do your research before applying for any credit card or loan. Be aware that secured credit cards can charge high fees and carry high interest rates if you don’t make your payments on time.
3. Consider rent reporting services
Do you rent an apartment or plan to live off-campus during college and your name is on the lease? If so, your rent payments may count toward your credit history—but only if they’re reported to credit bureaus. Credit bureaus don’t automatically collect this information. This means that you don’t get credit for paying your rent on time every month.
Here’s where rent reporting services can help you build your credit by reporting your monthly rent payments to the credit bureaus. And depending on the service, you can also get recognition for paying utilities and phone bills on time. Even if your landlord doesn’t participate, you can sign up on your own; just be sure to check for any fees.
4. Take out a student loan
If you’re planning on taking out a student loan for college, having the loan in your name may help build your credit score.
Before you take out a student loan, it’s important to understand how student loans work and be prepared to make the payments.
5. Make your payments on time
Payment history is a major factor of your credit score. A single missed or late payment can result in a lower score—which is exactly what you want to avoid when you’re first starting to build credit.
Here are some steps to help ensure you never miss a payment:
- Pay your bills in full and on time each month.
- Set calendar reminders for when your payments are due.
- Manage your cash flow throughout the month so that you’ll always have enough money set aside to cover your payments.
- Consider setting up auto-payments.
6. Keep your credit card balances low
Carrying a high balance on your credit cards can lower your credit score. That’s because a high credit utilization rate may be seen as risky by lenders. Try to keep your credit card balances low—ideally, no higher than 30% of your available credit.
You can also pay your balance down throughout the month or pay for some expenses in cash (instead of credit) to keep your utilization rate low.
7. Start as early as you can
The longer you have credit history, the better it may be for your credit score. The sooner you start taking steps to build credit, the better off you may be in working toward the financial future you want.
While you can’t open your own credit card before you turn 18, you can become an authorized user on someone else’s card when you’re younger. Getting even a few years of credit history established in this way can make a big difference.
As your credit history continues to improve, you may find yourself eligible for credit cards that carry lower interest rates or that offer better rewards programs.
Take charge of your credit
Taking charge of your credit at an early age is a smart financial move. It impacts your ability to get approved for loans, secure low interest rates, and even lease an apartment.
It’s your responsibility to keep track of your credit score. Here are 2 ways to do so:
- Check your credit score using a free credit score website or with your credit card provider. You can check your score for free anytime but a credit report is free once per year.
- When you review your credit report, confirm that the information is accurate and complete and be sure to check all your reports because lenders might not report information to all 3 credit bureaus. If the information listed in one of your reports is inaccurate or incomplete, dispute it with the reporting credit bureau.
And if you find yourself in a situation where you need to improve your credit score, consider these 8 ways to improve your credit score.