Turning 18 is undoubtedly one of the most pivotal points in life. You are either getting ready to start college or trade school, looking forward to your gap year, or looking for employment.
Whether you’ll get a student loan or start working immediately is primarily influenced by your financial situation. At this stage, you’ve probably heard a lot about credit and its importance.
It could be overwhelming to determine what is the best way to build credit at 18, as your experience with it is not very substantial. Let’s determine the methods for building credit at this age and other related topics.
The Importance of Having a Good Credit
Before figuring out the best way to build credit at 18, it’s probably better to learn why it is essential to have good credit in the first place.
The modern economy is based on credit. For transactions like applying for a student loan or getting a car out of a dealership, you will most likely need a lender. This financial entity can issue you a line of credit.
A line of credit is not a right; it is a privilege for those who are worthy. You being deserving is defined by the three-digit credit score, which is one of the essential aspects of your financial standing.
Having good credit can be the deciding factor in whether you qualify for different types of loans. If you have bad credit, getting a low-interest credit card would be more challenging. It will affect your chances of getting approved for long-term financial commitments, like mortgages and student loans.
Even if loans are not a priority for you, good credit can be significantly beneficial. Credit information is routinely used as a reference by employers, insurance companies, and landlords. In certain ways, people with good credit are most likely to be trustworthy and reliable.
Bad credit could imply that you are risky. While your credit score only indicates how you handle debt, some may translate that your personal life mirrors your financials. For example, you are less likely to get approved for a rental apartment if the landlord learns about your bad credit. They will assume that you are not likely to pay the rent in a timely manner.
What Is a Credit Score?
Credit scores are utilized to assess a person’s likelihood of paying a loan within a specific deadline. Credit scoring models are used by financial entities to help determine a person’s worthiness to receive credit.
There are multiple of them, each with its own methodology for calculating scores based on the data in the credit reports. Even the most well-known credit scoring agencies, FICO and VantageScore, use various credit-scoring models to generate scores.
They utilize a numerical range from 300 to 850. Let’s check the credit score ranges to understand how a good credit history looks.
300 to Low 600s
When you have this credit score, it is considered poor. A bad credit score is not necessarily a financial quicksand you can’t escape once you’re there. Products such as secured credit cards can assist people striving to improve their credit scores.
High 500s to Mid-600s
Anywhere within this range might get you a fair credit score. You might notice that you are prioritized more over those with poor credit scores when applying for a loan. Still, keep paying your dues on time until you have a better score.
Mid-600s to Mid-700s
People with good credit often have scores anywhere in the mid-600s to mid-700s. The advantages of having a score in this range are higher chances of loan approvals and getting better interest rates. These scores will not earn you the best interest rates, but they will reduce your chances of paying excessive fees, which is a major benefit.
When your score is over the mid-700s, be grateful because it is categorized as a very good or excellent credit score. While not the best possible score, getting a score near the 800 range is tremendously impressive.
People with this score are more likely to get approved for credit with very low interest rates. Obtaining an above mid-700s will take a long time, so be patient if this is your objective.
What Are the Advantages of Having a Good Credit Score?
While some of the benefits were briefly mentioned in the previous sections, it would be better to discuss them in detail. What even is the point of wanting a good credit score? Here’s what you can enjoy by being financially responsible at a young age:
Lower Interest Rate
Lower interest rates are usually granted to those with good credit. With lower interest on your debt, you will save a significant amount of money in the long run. That’s why working to improve your credit is one of the best financial actions you can make.
A good credit score may get you better loan conditions in other ways besides lower interest rates. For example, there’s a possibility that you can get loan fees waived or avoid penalties on late payments.
Higher Chance of Credit Approval
Banks and lenders are more confident to accept your credit applications if you have a good credit score. You will have better chances of being approved when applying for loans, credit cards, and mortgages.
Overall, those with good credit are deemed low-risk. They will have an easier time obtaining a loan accepted than a high-risk applicant.
More Rewards and Perks
A good credit score can help you obtain more premium credit cards with greater reward programs and bonuses. Some prestigious credit cards that give the best incentives need a minimum credit score of 650 or above.
Some credit card programs may result in hundreds of dollars in gift cards, rebates, or chances to win all-expense-paid vacations. All of this is possible as long as you have and maintain a good credit score.
Higher Credit Limit
Once you have higher credit limits, you can make large purchases or cover unexpected bills. They can also help keep credit use lower. Credit utilization is one of the primary elements that contribute to your credit score.
To explain how this works, let’s say you spend $1,000 in expenses monthly with a credit limit of $2,000. Your utilization is 50%, which will negatively impact your credit score. However, if you have a $10,000 credit limit, you will have a 10% utilization. The credit score will benefit from this.
Lower Insurance Premiums
Almost every insurer will run a credit check. Insurance companies consider the credit score when deciding whether or not to take customers and the premium they will charge. Having good credit can be the deciding factor for you to get approved and enjoy discounts on vehicles, property, or life insurance.
In some cases, bad credit might be the reason why some are charged double or triple the amount of average premiums.
Best Way To Build Credit at 18
Now that you know just how important it is to have good credit, it’s time to talk about how you can achieve this goal. Here is some expert advice that can help you build credit even at a young age:
1. Become an authorized credit card user of a friend or relative.
One of the most effective methods to build credit 18 is to become an authorized user on a credit card of a family member or friend. Once you become one, you can exploit the primary account holder’s credit to create your credit history. Authorized users are essentially immune from penalties, making this a low-risk approach.
That said before you decide to go down this route, ensure that your relative or friend maintains good credit and doesn’t have issues with their credit card. It’s not advisable to be an authorized user on an account with massive debt or a history of late payments. These damaging behaviors will reflect on your credit history and could undermine your credit-building efforts.
On a side note, ensure you do your part in being a responsible credit card user. Just because you are only an authorized user doesn’t give you the freedom to be a reckless spender.
2. Get a student credit card.
Student credit cards are intended for university students or young adults. Several credit card companies offer them, which makes getting one an excellent option for building credit.
Some cards require you to be an active student, but others won’t demand you to be one. These cards often maintain low credit limits, but they could be instrumental in building credit. You can even find student credit cards that offer additional rewards if you get good grades.
3. Apply for a secured credit card.
Try getting a secured credit card if you find it difficult to get a student credit card. The setup for this card is pretty straightforward since your deposit becomes your credit limit. You may use the card however you prefer, just like a regular credit card.
While it appears to be the answer to what is the best way to build credit at 18, they often have higher interest rates. However, if you settle your entire debt in full on or before the due date, the interest won’t apply.
Some secured cards have low annual fees or none, while others include incentive schemes. Compared to other financial products, it’s easier to get these cards.
4. Use credit-building tools.
There are ways how to build credit without using a credit card. Look for a financial institution that provides credit-building services, or you may have to subscribe to their paid monthly plans. If you are not willing to pay, Experian has a free and user-friendly tool called Experian Boost.
This program provides credit for the timely monthly payment of mobile phone, utility, and streaming service bills. Currently, the tool supports streaming payments for Netflix, Disney+, HBO, Starz, and Hulu.
Link the bank account you use for payment, confirm the information, and verify you intend to put it on your Experian credit file. Once accomplished, you will receive an updated FICO Score as well as your Experian credit report copy for free.
Building Credit While Young FAQs
1. How to build credit fast?
There are some tips to build a good credit score faster besides the recommendations in the previous section. Here are some to keep in mind:
- Errors in the credit report can impact your credit score. Be vigilant and request corrections if you find anything that needs correction.
- Anyone with little to no credit can benefit from a credit builder loan. However, it is not a standard loan because the funds you want to borrow are stored in another account.
2. How long does it take to build credit?
Most estimate it would take at least six months to establish a decent credit activity. You may easily create a good credit score if you are always on time to pay your debts and do not exhaust the available credit limits.
On the other hand, lowering your score is a lot easier. A delayed payment might be enough to damage a decent credit score.
Credit scores are calculated using data from your monthly credit reports. You should have good credit if you’ve made timely payments in succession for months and your creditors reported them to the three major credit bureaus properly.
3. Where to get a free credit report?
Every 12 months, you are eligible for a free credit report from each of the three main consumer reporting companies, namely Experian, Equifax, and TransUnion. You may also request from AnnualCreditReport.com in regards to a free credit report.
4. Are there disadvantages to building a good credit score?
If you are planning to build credit 18, keep in mind that there is no downside once you are successful. One of the most dangerous aspects of having good credit is the higher credit limit.
It’s not necessarily bad, but it could tempt you to purchase more expensive items. At any given time, it is possible that you’ll get carried away, which will take a toll on your financial health. Lenders might also target you with a multitude of offers if you have good credit.
It’s still up to you, but it can be cumbersome to constantly receive promos and investment opportunities you are not interested in.
5. Are you allowed to use a student loan to purchase a new car?
Student loans are applicable to cover expenditures such as college tuition and transportation. However, purchasing a car is not allowed.
A car may be necessary if you are residing off-campus, but it is not required by the school. Some institutions even prohibit students from driving on campus to prioritize parking for employees.
Being Financially Responsible At 18
Building credit at the early age of 18 is a smart way to start your journey into adulthood. You may find it easy, but the challenging part is keeping it that way.
It is easy to fall into the trap of overspending, which could significantly impact your financials. As much as possible, use your credit card for small purchases only. Then, you may up the ante a bit once you get a good-paying job.