How To Build Credit At 18: Credit Score Strategies

When you turn 18 years old, credit becomes one of the most influential financial tools you can possess. Building good credit paves the way for favorable interest rates on loans and housing opportunities and can even affect job prospects.

Let’s go over some tips and methods to help your credit grow and create better financial options for yourself as you start building your life as an adult.

Understanding Credit And Your Credit Report

Let’s explore a basic breakdown of what credit is, how it impacts you and what you’re able to do with it from the beginning.

What Is Credit?

Credit is your ability to borrow money, access goods or acquire services with the understanding that you'll pay later. Your creditworthiness is determined by your credit history as reported to the three major credit bureaus: TransUnion^Ⓡ, Experian^TM and Equifax^Ⓡ.

Your credit report is a record of credit that has been extended to you and how responsible you've been at managing your debt. It takes into account your payment history, and any negative remarks you might have against you on your credit history.

The Credit Paradox

Young adults will quickly become aware of the paradox of credit: You need credit to build credit. 

Lenders and credit scoring models need a way to gauge your reliability as a borrower. Essentially, they want evidence that you can manage debt responsibly. However, without any credit history, they cannot predict your behavior. That's why obtaining your first form of credit and using it wisely is crucial. Building credit at 18 years old allows you to begin compiling a credit history, which helps you build your credit score.

Credit Scores: A Breakdown

Understanding the nuances among the ranges of credit scores and knowing what affects your score can help you make good decisions for your financial health. Let's explore the five primary credit factors that influence your overall FICO^® Score.

Payment History (35%)

Payment history is the most significant factor affecting your credit score, accounting for 35% of the formula that determines your credit scores. It reflects consistency in paying off your debts on time, including credit card payments, loans and other credit accounts. Late payments, defaults, bankruptcies and foreclosures can negatively impact your score. A history of on-time payments can enhance your score.

Credit Utilization Ratio (30%)

The credit utilization ratio measures how much of your available credit you're using. This factor accounts for 30% of your credit score. It is calculated by dividing your total debt by your total available credit. Financial experts often recommend keeping your utilization below 30% to maintain a good credit score. High utilization can signal that you're overly reliant on credit, potentially indicating you’re a higher risk to other lenders.

Length Of Credit History (15%)

The length of your credit history accounts for 15% of your credit score and is determined by the average age of your credit accounts. A longer credit history is beneficial as it provides a longer glimpse at your spending habits and repayment behavior. This factor considers the age of your oldest account, the age of your newest account and the average age of all your accounts.

Types Of Credit In Use (10%)

Credit mix refers to the variety of credit products you have, such as revolving debt like a credit card account, installment loans like a personal loan and long-term secured purchases such as mortgages and car payments. This diversity impacts 10% of your score. Having a mix of credit types can positively affect your score, as it shows lenders that you can responsibly manage having different types of credit extended to you.

New Credit And Inquiries (10%)

New credit includes the number of credit inquiries and the opening of new credit accounts. This influences 10% of your credit score. Each time you apply for credit, a hard inquiry is made, which can slightly lower your score temporarily. Opening several new credit accounts in a short period can be perceived as risky behavior by lenders as it may indicate financial distress.

Monitoring Credit With Credit Bureaus

Monitoring your credit with credit bureaus is essential in managing your financial health. Regularly checking your credit reports from the three major credit bureaus – TransUnion^Ⓡ, Experian^TM and Equifax^Ⓡ – can help you understand your financial standing, spot any inaccuracies and point out potential signs of identity theft. Here’s a three-step method to monitor your credit:

1. Request free credit reports. You’re entitled to one free credit report from each of the three credit reporting agencies every 12 months, or potentially more often, through AnnualCreditReport.com.

2. Review for inaccuracies and report them. Review your credit reports for any errors or discrepancies. Your credit profile may be thin at first, but over time it will grow. Check your personal information to look for credit accounts that don't belong to you and transactions you didn't authorize. Reporting any inaccuracies immediately can help to rectify them and protect your credit score.

3. Set up alerts. Many credit reporting services offer alert systems that notify you of any changes to your credit report. This can include new accounts being opened in your name or significant changes to your existing accounts. Setting up these alerts can be a proactive way to monitor for fraudulent activity. 

Now that we've covered the foundational elements of credit scores, we'll shift the focus to practical resources and strategies.

Initial Tools To Build Credit

Knowing where to start can be the biggest challenge for young adults beginning their financial journeys. There are several methods that can set you on the right path toward building a strong credit history from scratch.

Secured Credit Card

A secured credit card can be an early ally in building credit without a credit score. These credit cards are typically backed by a cash deposit you make to secure the line of credit. Your credit limit usually equals the amount of your initial security deposit. This deposit lessens the risk of lending to someone without an established credit history. With responsible usage and on-time payments, these cards can help you establish a positive credit history and may eventually be eligible for an upgrade to an unsecured credit card.

Become An Authorized User

Becoming an authorized user on someone else's credit card is another way to quickly build your credit. If you have a family member or trusted friend with a responsible credit history, you can ask them to add you as an authorized user on their account.

As an authorized user, you'll receive a card and can make purchases. Still, the primary cardholder is ultimately responsible for making payments. Some parents may make their child an authorized user, setting rules on if and when they can use the card.

When added as an authorized user, you receive the full credit history of the account, meaning an 18-year-old can quickly have a lengthy, good credit history. Regular use of the card and timely payment by the primary holder can quickly establish credit for the authorized user attached to it.

Credit Builder Loans

Credit builder loans are specifically designed to help individuals with no credit or bad credit to build a positive credit history. Unlike traditional loans, you don’t receive the money upfront and then make payments with a credit builder loan. Instead, the lender holds the amount in a secured savings account while you make payments toward the loan amount. Credit builder loans are usually repaid over a period of 6 – 24 months, at which point the lender releases the funds to you.

The key here is that your payment history is reported to the credit bureaus, which helps you build credit as long as you make timely payments. This type of loan can be costly, but it shows future lenders that you can handle regular, consistent payments responsibly.

Student Credit Card Accounts

Credit cards designed for students are another helpful tool in building credit. These cards often have lower credit limits so it makes it easier for young adults to qualify. They may also come with perks like cashback bonuses on student-related purchases or rewards for good grades. If you’re attending college, this can be a quality method to build credit as you get your degree.

Student Loans

Student loans can also serve as a means to build credit, particularly for young adults venturing into higher education. While it might not be the initial reason to take out a student loan, it's a consequential benefit. You're building your credit history from the moment you start repaying your student loans. Making consistent, on-time payments toward your student loans demonstrates your reliability as a borrower to future creditors.

Additional Credit Building Tips For Young Adults

While understanding the foundational elements of how a credit score is calculated and the initial tools to use to start building credit are crucial, there are additional practices that can further strengthen your credit score and financial health. Here are some practical tips: 

• Keep your utilization rate low. Aim to use less than 30% of your available credit. It's even better if you can keep it under 10%. This demonstrates to lenders that you're not overly reliant on credit for purchases.
• Pay bills on time. Late payments can significantly affect your credit score. Setting up reminders or automatic payments can help ensure you never miss a credit card bill or due date.
• Protect your financial information. Regularly monitor your credit report for any unauthorized transactions or errors. Use strong, unique passwords for online banking and credit accounts, and be vigilant against phishing attempts.
• Limit hard inquiries. Only apply for new credit when necessary. Too many hard inquiries in a short period can indicate risk to lenders and lower your score.
• Maintain old credit accounts. Older accounts contribute to a longer credit history, positively affecting your score. Consider keeping such accounts open, provided they're not costing you high fees.
• Increase your credit limits when possible. Requesting a higher credit limit can lower your credit utilization ratio – just make sure not to spend more after the limit is increased, as that would raise your utilization rate and defeat the purpose.

Adopting these strategies can help young adults not only build a strong credit foundation but also foster healthy financial habits that last a lifetime.

The Bottom Line

Building credit at 18 years old puts you ahead of the credit curve. By laying down a strong credit foundation today, you're investing in how you’ll pay for large purchases such as your first car, an education or a home.

Start building good financial habits and monitor your spending by downloading the Rocket Money℠ app today.