Navigating the world of credit can be daunting, especially for young college students who are just stepping into financial independence at the age of 18. Building a solid credit foundation is crucial for your future finances. The financial decisions you make can have long-lasting implications on your ability to secure loans, the interest rates you're offered, and even your eligibility for housing or employment. Having a strong credit score can reduce the amount of money you spend on interest and fees. However, as you transition into adulthood, it's common to have little to no credit history, which can make it challenging to secure a loan or rent an apartment independently, often necessitating a co-signer. To increase your ability to qualify for loans on your own terms and access more favorable interest rates, it's important to take some time to learn how to build credit at 18.This is the ultimate guide you need to build a good credit score confidently at 18. This guide aims to demystify credit-building and provide practical tips to help you build your credit score confidently at 18. We’ll cover the basics of how credit scores and reports work and give you useful tips on how to establish your credit.

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Understand the basics of credit scores & credit reports

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What is a credit score and why credit score matters?

A credit score is a three-digit number that represents your creditworthiness, derived from your credit history. It ranges from 300 to 850, with higher scores indicating better credit health.  Lenders, landlords, and employers use this score to determine how risky of a borrower you may be. Credit score is important because a good credit score can unlock lower interest rates on loans and credit cards, higher borrowing limits, and even influence your job prospects and rental applications.

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How your credit score is calculated (aka. factors that affect your credit score)

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Your credit score is determined by five key factors.

• Timely payment history. This means you pay your bills on time. For example, if you have a car loan and your payment of $350 a month is due on the 1st of every month, you should make sure that you make your monthly payment by the 1st of every month to ensure a consistent on-time payment history.
• Credit utilization ratio. This is essentially the amount of debt you owed relative to your credit limits. In other wores, this ratio represents how much credit you are using. If the ratio too high, it could lower your credit score because it suggests you're borrowing too much.  For example, if you have a credit card with a credit limit of $1,000 and you have a balance on it of $500, you have a credit utilization ratio of 50%. That’s not good. A rule of thumb is keeping your credit utilization ratio under 30%, signaling to your lenders that you're managing your credit well.
• Credit age. This refers to the length of time your credit accounts have been open. A longer credit history is beneficial because it provides more data on how you manage credit over time. Lenders favor borrowers with longer credit histories because they are viewed as less risky.
• Credit mix. Credit mix refers to the variety of credit accounts you have, such as credit cards, installment loans, mortgages, and car loans. Having a diverse mix of credit can positively affect your credit score because it demonstrates your ability to manage different types of credit responsibly.
• Number of recent inquiries. Each time you apply for new credit (e.g. credit card and car loans), it triggers a hard inquiry and it could slightly lower your score. However, the effect of hard inquiries diminishes over time, and they only remain on your credit report for two years.

Since payment history and amount of debt owned constitute 65% of your score, it’s crucial to maintain a positive payment history and keep your debt levels low as you start to build your credit at 18.

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What is a credit report and why credit report matters?

A credit report functions like a financial scorecard, providing lenders with a snapshot of your credit history, including your payment record,  your credit accounts, and your current debts. Timely payments can bolster your credit score, whereas delinquencies can undermine it. Lenders use the information in your credit report to determine your creditworthiness, which influences the terms and interest rates of any credit extended to you. Landlords may use it to decide whether to rent to you, and employers might check it as part of their hiring process to assess your financial responsibility.For instance, payments overdue by more than 30 days are typically reported to one of the major credit reporting agencies—Experian, TransUnion, or Equifax. A late payment like this on your credit report may lead lenders to view you as a higher credit risk. Such derogatory marks can linger on your report for up to seven years.Because your credit report can have a significant impact on many areas of your life, it's important to regularly review your report from each of the three major credit bureaus.

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What’s typically included in a credit report?

• Personal Information: your name, Social Security number, addresses, date of birth, and employment data
• Credit Accounts: Lists all your credit accounts—credit cards, loans, mortgages—detailing the type of account, opening date, credit limit or loan amount, balance, and payment history.
• Credit Inquiries: hard inquiries (when lenders check your credit for lending decisions) and soft inquiries (like checking your own credit). Hard inquiries can affect your credit score, while soft inquiries do not.
• Public Records: Contains information on bankruptcies, foreclosures, court judgments, and tax liens, which can significantly impact your credit score.
• Collections: Shows accounts turned over to collection agencies, negatively affecting your credit score.
• Consumer Statements: Allows you to add a statement if you disagree with the resolution of a disputed item on your report.

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Advantages of building credit at 18

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Building credit at 18, especially for college students, offers tangible benefits that can significantly impact their financial journey during and after their college years. Here are some advantages:

• Lower Interest Rates on Student Loans and Credit Cards: A good credit score can qualify students for lower interest rates, saving them money on loans and credit card balances.
• Approval for Higher Credit Limits: With a solid credit history, financial institutions are more likely to offer students higher credit limits
• Better Car Insurance Rates: Some car insurance companies use credit scores to help determine premiums. A good credit score can save you money on premiums.
• Easier Approval for rental apartments: Many landlords conduct credit checks to screen potential tenants. A good credit score can make it easier to get approved for apartments or rental homes without needing a co-signer, giving you more options for where you live.
• Financial Independence: By building credit early, students can qualify for loans without needing their parents to co-sign.
• Career Opportunities: Some employers check credit scores as part of the hiring process so having a good credit score is always a good to have for students who are looking for jobs.

How to start building credit at 18

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Become an Authorized User

One way to start building credit at 18 is to become an authorized user on a parent’s or other adult’s account. An authorized user is connected to a primary credit card account, and has permission to use another person’s credit card, but isn’t legally required to pay the credit card bill. In other words, as an authorized user, you can have your own card with your name on it, but the account still belongs to the primary cardholder. The primary cardholder is responsible for the payments and charges made to the account.You want to be sure the primary cardholder is paying their bills on time and in good financial standing. As an authorized user, your credit can benefit from the positive (or negative) financial habits of the primary cardholder. If the person who lists you as an authorized user makes a late payment, it could negatively impact your score. So it’s important to make sure the parent, friend or family member you choose has good credit and financial habits. Lastly, make sure that the credit card company reports activity for authorized users. Otherwise, you won't build your credit. To be added as an authorized user to an account, the primary cardholder can call their credit card company, or in some cases, they can add you as an authorized user on their account online.

Open a secured credit card

A secured credit card like Firstcard’s Credit Builder Card is an excellent choice for your first credit card, particularly for individuals with no credit history or those looking to rebuild credit. Unlike traditional credit cards, secured cards require an upfront deposit that determines your credit limit. It requires an upfront deposit because it serves as collateral for the credit card issuer. For example, if you deposit $500, your credit limit will also be $500. The deposit minimizes the risk for the issuer by providing a safety net in case the cardholder fails to make payments on their credit card balance. Thus, this setup allows lenders to take on young students at 18 with no credit history or a poor credit score. And since secured credit card activity is typically reported to the major credit bureaus, you can build or rebuild your credit safely with secured credit cards. With Firstcard’s Credit Builder Card, you will not only be able to establish and build your credit score, you will also be able to earn cashback and a high APY for the money you deposit in Firstcard.

Take out a credit builder loan

A credit builder loan is designed specifically to help individuals build or improve their credit history. Unlike traditional loans, where you receive the borrowed amount upfront and then make payments to pay it off, a credit builder loan holds the borrowed amount in a secured savings account (rather than giving it directly to you upfront) and you need to make monthly payments towards the loan. As you make on-time monthly payments, these payments are reported to the major credit bureaus, contributing to a positive payment history. At the end of the loan term, you will not only build a good credit history, you will also get some savings as you will get a lump sum of your money!

Take out a student loan

If you're in need of additional funds for college, taking out a student loan could be beneficial for building your credit. This approach offers the dual advantage of getting a loan and initiating your credit history early on at 18. Moreover, if your credit portfolio only consists of a credit card, introducing a student loan diversifies your credit mix—the variety of credit accounts under your name—potentially boosting your credit score.

Take out a car loan

Taking out an auto loan to finance a car purchase can aid in credit building as well. Similar to other forms of loans, the payments you make on an auto loan are reported to credit reporting agencies. So making consistent on-time auto loan payments can help you build credit. Additionally, having an auto loan can benefit your credit score by diversifying your credit mix.

Open a checking and savings account

Opening a checking and savings account doesn't directly impact your credit score, as these accounts are not reported to credit bureaus. However, maintaining these accounts responsibly can indirectly contribute to building credit since they can make it easier to manage and demonstrate your ability to handle credit. While not a direct factor, a positive banking history can complement other credit-building efforts and contribute to an overall strong financial profile.

Make payments on time

Making payments on time is crucial for building credit as it directly influences your credit history and score. Credit reporting agencies compile information about your credit accounts, and a positive payment history, reflecting timely payments on credit cards, loans, and other debts, significantly boosts your credit score. The impact is substantial, with payment history often comprising around 35% of your total credit score, according to common scoring models like FICO.

Automate your payments

Since payment history has the biggest impact on your credit (at 35% of your score as mentioned above) it’s highly recommended that you automate your payments. Turning on autopay is a convenient and effective strategy for building credit as it ensures timely payments on credit accounts without the need for manual intervention. Autopay automatically deducts the minimum payment or the full balance from your linked bank account on the due date, reducing the risk of forgetting or missing payments. This consistent and punctual payment behavior positively influences your credit history and, consequently, your credit score. By eliminating the possibility of late payments, autopay demonstrates financial responsibility to creditors and contributes significantly to a positive credit profile. This automated approach not only simplifies the management of credit but also reduces the likelihood of negative marks on your credit report, facilitating the gradual and steady improvement of your creditworthiness over time.

Regularly check your score

Regularly checking your credit score is a proactive step in building and maintaining good credit as it allows you to stay informed about your financial standing. It also enables you to quickly identify any potential errors or discrepancies in your credit report. By promptly addressing inaccuracies, you can prevent them from negatively impacting your credit profile. Additionally, consistent monitoring enables you to track the impact of your financial decisions on your credit score, providing valuable insights into areas where improvement may be needed. This awareness empowers you to make informed choices, such as reducing debt or ensuring timely payments, to positively influence your creditworthiness over time. Ultimately, the habit of regularly checking your credit score fosters financial responsibility and helps you build a strong and reliable credit history.

Rental payments

Using rental payments to build credit is a strategy that can benefit those who do not have traditional credit accounts like credit cards or loans. While rent payments are not automatically reported to credit bureaus, there are specialized services that can help you include them in your credit history. By enrolling in these services or working with your landlord to report rent payments, you can establish a positive payment history.

Get a job

Though getting a job will not directly impact your credit score, having a job can significantly impact your ability to build credit by fostering financial stability and responsibility. A reliable income stream ensures that you can meet your financial obligations, including credit payments, reducing the risk of negative marks on your credit report. As you consistently earn and manage your finances, lenders view you as a less risky borrower, positively influencing your creditworthiness and contributing to the gradual improvement of your credit score.

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Common mistakes when building credit

Here are some common mistakes students make when trying to build their credit:

• Missing or late payments: Late or missed payments harm your credit score significantly as they indicate unreliability to lenders.
• High credit utilization: Utilizing a large portion of your available credit suggests financial stress, negatively impacting your credit score.
• Applying for too many credit accounts: Multiple credit applications can lead to hard inquiries that temporarily lower your credit score, signaling potential financial distress.
• Ignoring credit report errors: Not regularly checking your credit report for errors can leave inaccuracies unaddressed, potentially lowering your credit score unjustly.
• Closing old credit accounts: Shutting old accounts can shorten your credit history length, negatively affecting your credit score.
• Co-signing loans without understanding the risks: Co-signing makes you responsible for someone else's debt, potentially harming your credit if payments are missed.
• Avoiding credit cards: Some students are afraid of opening credit cards. However, lack of credit history makes it challenging for lenders to assess your creditworthiness, hindering your ability to secure loans or credit.
• Maxing out credit cards: Reaching your credit limit increases your credit utilization ratio and can lead to debt that's hard to manage, damaging your credit score.

How to monitor your credit

Monitoring your credit is a critical aspect of managing your financial health. Here’s how to effectively monitor your credit:

• Check your credit reports regularly: You are entitled to one free credit report per year from each of the three major credit bureaus—Equifax, Experian, and TransUnion—through AnnualCreditReport.com.
• Use credit monitoring services: Many companies offer credit monitoring services that alert you to changes in your credit report, such as new accounts opened in your name, credit inquiries, or potential signs of identity theft. If you use Firstcard’s credit builder card and download the app on your phone, you can see your credit score right in the app. Reviewing these reports can help you identify any errors or fraudulent activity that could affect your credit score.
• Set up alerts: Many credit monitoring tools and financial institutions allow you to set up alerts for certain activities, such as when your credit score changes or when a new credit inquiry is made. These alerts can help you stay on top of your credit without having to check manually constantly.
• Review your bank statements and accounts regularly: In addition to monitoring your credit, regularly review your bank and credit card statements for any unauthorized transactions. Early detection of fraud can prevent it from negatively impacting your credit.

How long does it take to establish credit?

If your goal is to establish credit score, you need 3-6 months in general. This is the period needed for credit bureaus to have enough information to calculate a credit score. The credit score algorithms require this much information before you’re given a score.If your goal is to improve your credit score, you may see an improvement in as little as 30 to 45 days depending on specific action steps. Firstcard Credit Builder Card customers have improved their credit score by 60 points within four weeks.More often, it can take 12 to 24 months of responsible credit management to see a significant improvement in your credit score.

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For parents: how you can help your kids build credit early

For parents looking to give their children a head start in building a solid credit history, there are several effective strategies to consider. Helping your children establish good credit early can provide them with significant advantages when they're older, such as easier approval for loans, lower interest rates, and more. Here’s how you can help:

• Add them as authorized users: One of the simplest ways to start building your child's credit is by adding them as an authorized user on your credit card. This allows your credit history with that card to reflect on your child's credit report. It’s important to choose a card with a positive payment history and low utilization rate.
• Open a joint account: Opening a joint checking or savings account can teach your child financial responsibility and introduce them to the banking system. While this doesn’t directly affect their credit score, it’s a foundational step towards financial literacy and eventual credit building.
• Co-sign for a credit card or loan: For older teenagers, co-signing for a credit card or a small loan can help them establish credit in their own name. This approach requires careful consideration, as any defaults or late payments will affect both your and your child's credit scores.
• Encourage a part-time Job: Earning their own money can teach your child the value of money and responsibility. A steady income can also make it easier for them to get approved for their own credit card when they’re ready.
• Educate them about credit: Teach your child about how credit works, the importance of a good credit score, and how to manage credit responsibly. This includes explaining interest rates, the impact of late payments, and the benefits of paying off balances each month.
• Help them apply for a student credit card: Once your child is old enough and has some financial understanding, help them apply for a student credit card. These cards are designed for individuals with little to no credit history and often have features tailored to help build credit.
• Monitor their credit together: Teach your child how to monitor their credit score and report. You can use this as an opportunity to discuss any changes in the score and guide them on how to manage their credit better.
• Set a good example: Demonstrate good credit habits by managing your own credit responsibly. Your actions can teach your child about the importance of credit and how to use it wisely.

By taking these steps, parents can not only help their children build credit early but also instill in them the knowledge and habits necessary for lifelong financial health.

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Final thoughts

Building credit at 18 opens the door to a future of financial opportunities and independence. It's crucial to adopt responsible financial habits early on, such as making timely payments, maintaining a low credit utilization ratio, and diversifying the types of credit. Monitoring credit scores regularly and avoiding common mistakes such as overspending or applying for multiple credit lines in a short period, can further safeguard and improve one's credit standing. These strategies enable young adults to establish a strong credit foundation early, unlocking future financial benefits.