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Credit Cards

How To Start Building Credit At 18

By David Krug 5 minute read

Most individuals don’t give their credit scores much consideration until they’re applying for a loan or credit card. However, credit development is critical to prioritize, even at a young age.
This is why – Your credit score may have a significant influence on various elements of adult life, including your ability to borrow money, purchase items on credit, and obtain better rates on insurance, loans, and other financial products. It may even be a decisive factor in whether or not you get hired for a certain position.

Credit does not have to be daunting or frightening. Indeed, it is only a mathematical formula that assists creditors in determining whether or not they can rely on you to pay your obligations, both now and in the future. Creditors use your credit history to make forecasts. 

The longer your credit history, the more information they have.
Due to the fact that credit is built over time, it’s ideal to begin starting as soon as feasible.

Credit Establishment for the First Time

Establish a Bank Account

Open a bank or savings account, if you haven’t already, to help you get off on the right foot. Making payments and transferring money without a bank account might be excessively complicated in today’s digital age. Many people create both a savings and checking account to keep their money separate; money needed to pay off credit cards or other debt goes into the checking account, while money set aside for a rainy day fund or investment goes into savings.

How it aids in credit establishment: Bank accounts simplify payment and money transfer while also allowing for the development of credit.

Consider Your First Credit Card

One of the most common ways to establish credit for the first time is to begin using a credit card. Credit growth increases steadily overtime when a restricted credit line is used effectively. The caveat – and it is a substantial one – is the vital significance of paying your monthly balance in full and on schedule. There are no exceptions to this rule. Consider your credit line to be an extension of your bank account; avoid using your credit card if you do not have one.

How it contributes to the building of credit: When you use and return a credit card, creditors may assess your financial responsibility, assuming that you understand how to manage your money. For example, if your credit limit is $500 and your monthly spending continuously falls below the limit while payments are made whole and on time, your credit limit and credit score are likely to increase.

Become an Authorized User

As long as the account has a lengthy history of on-time payments and a modest balance, being added as an authorized user to one owned by a trustworthy parent or guardian can assist enhance your score.

It’s also useful to know that being listed on an account as an authorized user does not necessitate carrying a credit card for that account with you at all times. Establishing good credit: As an authorized user, you can benefit from a parent or guardian’s existing credit history, which can increase your credit score.

Open and Pay Off a Loan

If you don’t have access to a credit card, you may improve your credit by taking out a school loan or auto loan and paying it off quickly. Taking on the responsibility of repaying a loan indicates your ability to handle debt. Make a good first impression by pledging to pay back the loan on whole and on schedule on a regular basis.

Establishing good credit: Paying off a loan in your name shows the banks that you can be trusted with a credit line they’ve granted to you. As a result, you’ll pay less interest on the loan in the long run. Bonus!

Recognizing a common thread

In order to create credit, you must demonstrate to lenders that you can responsibly manage the credit lines that have been provided to you. Regardless of the method you pick, you must commit to making regular payments that are both timely and complete.

There are five primary sources of creditworthiness

The best method to improve your credit score is to learn about the most important determinants of your score and then work diligently to improve those aspects of your credit that matter most. According to the reporting agency, a person’s credit score might range anywhere from 300 to 850. With “Excellent” credit being 750 or greater, the higher the number, the better the grade is.

1. Payment History – 35%

The most important component in the history of payments, which is also the most easily influenced. By demonstrating your ability to make timely payments on your debts, you demonstrate to potential lenders your level of fiscal accountability. Making late or no payments is a red signal to lenders, and you may have a hard time getting new lines of credit in the future if this is a pattern.

2. Credit Utilization – 30%

It is the proportion of your credit limit that you are currently using. Then, let’s assume you have a $1,000 balance on each of your two credit cards. Your credit score will go up if you keep your credit card usage below 30%. Even if you pay all of your bills on time each month, if you frequently exceed your credit limit, this might hurt your credit score.

3. Credit Age – 15%

Your credit score is also affected by the duration of your credit history. As a young adult, you don’t have a lot of say over your career path, but that’s one of the reasons you should get started right away.

Borrowers like working with accounts that have been open for a long time since they have a better track record. The process can’t be accelerated, and that’s a bummer. Closing a credit card account, for example, removes that history from your credit report. Keep your credit accounts open to maintain a long credit history.

4. Account Mix – 10%

Your credit report’s mix of accounts also influences your score. Student loan vs. credit-card debt, vehicle loan debt, etc. have different effects on your credit score than others. As long as you’re making timely payments on all of your accounts, having a varied portfolio can help you build a reputation as a responsible shopper.

5. Credit Inquiries – 10%

The amount of times your account has been queried also has an effect on your score. Your credit score may suffer if you take out several lines of credit all at once. It shows your creditors that you are dependent on credit and may have problems repaying your debts if you continue this pattern of conduct.

Make sure you can afford to repay any new credit accounts before opening any in this location.

Bottom Line

One of the best ways to prepare for adult financial success is to establish credit early in life. An investment of time and money that might save you thousands of dollars in interest and other payment rates if you have a poor credit score is well worth it at the tender age of 18 years old.