As you step into adulthood, you start being more financially independent. As daunting as it may seem, a few good decisions can set you up for a more secure future. Building credit early is certainly among them, as it unlocks many opportunities you’ll want to take advantage of when going through important milestones.
This guide will highlight such opportunities and teach you how to secure them. You’ll learn how to build credit at 18 despite the roadblocks you may run into as a young adult.
How Do You Benefit From Building Credit at 18?
A good credit profile is among the most important documents of any adult. It shows your reliability as a borrower and directly impacts your chances of getting a loan. If your credit history shows that you’re trustworthy, you can enjoy peace of mind knowing you can get a loan or credit card when needed.
From a new phone to your first apartment, numerous purchases involving borrowed money will require a clean credit report. It may even impact your ability to rent an apartment or get a job, as landlords and employers might do a credit check to assess your level of responsibility.
Good credit can also help you get favorable insurance policies. While you might think it’s early to think about this, insurance can be a significant expense you should try to minimize proactively. Insurance companies consider financial management an important risk factor, so a strong credit profile can keep your premiums low.
To open all the important doors, you should start working on your credit profile as soon as possible. The main reason to start early is to maximize your credit history length, which significantly impacts your score. The problem is that young adults have limited options for establishing a credit file.
Why Building Your Credit at 18 Might Be a Struggle
Source: RODNAE Productions
When you start your credit journey, you may find yourself in a catch-22—you can’t take out credit without a credit history, which you can’t build without a credit product. While 18 is the legal threshold for taking out a loan or a credit card, you may not be able to do it for a few more years because of the restrictions set by the CARD Act of 2009.
The Act forbids banks from issuing credit cards to anyone under 21 unless they meet one of the two conditions:
- Being able to demonstrate an independent ability to make payments
- Having a co-signer over 21 who can be held accountable for the debt
The main way to check the first box is to have a steady job with a reliable income stream that the bank can count on for payments. Most teens aren’t in this position as they mainly do part-time jobs for pocket money, and many college students are full-time students with no independent income.
The second condition requires an adult who can co-sign the account. Not everyone can do this, especially if they have existing credit, as assuming responsibility for another account may take their debt-to-income ratio over the allowed limit or increase their utilization, dropping their credit score.
If you can’t meet either of the CARD Act conditions, don’t fret—there are still ways to establish a credit profile early.
How To Start Building Credit at 18—Six Tips To Follow
Not qualifying for a traditional credit card or loan doesn’t prevent you from building credit. Follow these tips to establish the foundation of a remarkable credit file:
- Learn how credit building works
- Get a secured credit card
- Take out a student credit card or loan
- Become an authorized user of your parent’s card
- Get a credit-builder account
- Use your credit products wisely
- Let your parent help
Understand the Basics of Credit Building
When you take out credit, the lender tracks your payment history and overall management of borrowed funds. They report your behavior to credit bureaus, which assign a score accordingly.
The FICO® scoring model is the most popular, and it determines your credit score based on five factors with assigned percentage values depending on their impact. While there are many different versions of this model, FICO Score 8 is the most commonly used—take a look at the factors it relies on:
|FICO Score 8 Factors||Explanation||Credit Score Impact|
|Payment history||The record of all your past payments showing whether they were paid on time, late, or missed.Payment history is the most important factor in determining your credit score||35%|
|Amount owed/Credit utilization||Amount owed for loans—the amount you owe each lender individually and in total.Credit utilization for credit cards—how much of your credit limit you’re using, expressed as a percentage (e.g., $300 used of a $1,000 credit limit is 30% utilization)||30%|
|Credit history length||The amount of time your credit accounts have been open and active—the longer, the better||15%|
|New credit||New accounts, recent credit inquiries, and the age of your most recently opened credit account||10%|
|Credit mix||The types of accounts on your credit profile. Loans are installment credit accounts and credit cards are revolving credit accounts. You want a mix of both types on your credit profile||10%|
You can get your first FICO score after six months of using credit, and it will likely be between 500 and 700. The full range is 300–850, and your score will vary depending on your credit behavior.
You’ll learn about the best ways to maximize it as soon as we explore the most common credit options you might be eligible for.
Consider a Secured Credit Card
Source: Blake Wisz
Secured credit cards are similar to traditional options, but they’re more accessible to people with limited to no credit history. This is because they require a security deposit, which reduces the lender’s risk.
Your security deposit will typically be the same as your credit limit, though some banks might offer an amount exceeding the deposit. You’ll still need to repay any funds you use alongside the corresponding interest.
The main drawback of secured cards is a high Annual Percentage Rate (APR)—the yearly interest on the used funds. You can divide it by 12 to get the monthly interest and see how much of your repayment goes toward the APR. A typical APR for secured cards is between 20% and 30%, so your borrowed funds can be quite costly.
Many banks offer secured cards, so do your homework and shop around to find the best one. When comparing your options, focus on the following factors:
- Credit reporting—Not every bank reports secured card activity to the bureaus, so avoid such lenders if you want to use the card to establish a credit profile
- Minimum deposits—Deposits typically range between $200 and $500, but some banks might let you get started with as little as $50
- Fees—Some banks charge processing, maintenance, and transfer fees that deplete your credit more quickly, so be wary of such options and look for more affordable ones
Explore Student Credit Cards or Loans
Student credit cards are specifically designed for young adults with limited credit history, so you’re more likely to take one out than a regular credit card. The only caveat is that the CARD Act restrictions apply to them as well, so you’d still need a stable income or a co-signer to be eligible.
Student loans are a good alternative if you don’t meet these conditions. Any student loan—private, refinance, or federal—will show up on your credit profile, so you can use it to establish and improve it.
However, since you don’t make payments on most student loans until six months after graduating, leaving school, or dropping below half-time enrollment, you won’t build payment history (which determines 35% of your credit score) while in school.
Note that you should only take out a student loan if you have an actual need for one. Doing it solely for credit-building purposes isn’t a good idea because the loan can be quite expensive, and there are more reasonable and convenient methods.
Become an Authorized User of Your Parent’s Credit Card
Parents sometimes add children to their credit cards until they’re ready to have their own. If your parent is willing to do this, you’ll either be using their credit card or get a separate one connected to their account.
Besides access to the funds, you’ll get a credit report and inherit your parent’s score. While this may seem appealing at first glance, it comes with a few disadvantages.
As your credit score will stay connected to your parent’s, either user’s behavior will impact both profiles. If you splurge or miss a payment, you may damage your parent’s credit and start yours on the wrong foot. Delinquencies can stay on your report for up to seven years, hurting your chances of taking out future loans.
Another issue is that you don’t build an independent credit profile as an authorized user—you piggyback on your parent’s as long as you’re connected to the card. When your parent removes you from it, all credit history associated with the card will be deleted from your profile, so you’ll be back to square one.
With this in mind, being an authorized user might be a temporary solution you can use as a last resort. If you have any other way to build credit independently, you should choose it over this method to avoid the aforementioned complications.
Get a Credit-Builder Account
A credit-builder loan is a loan specifically designed for borrowers with low or no credit scores. Its purpose is to help you demonstrate you can handle making on-time payments consistently and ultimately build credit. Credit-builder loans are different from traditional ones—instead of receiving the borrowed money upfront, you make fixed payments to your lender and get access to the loan amount once the loan term ends.
Keep in mind that not all financial products work the same. For example, with CreditStrong (a division of Austin Capital Bank), you get a secured consumer installment loan and a savings account at the same time—here’s how CreditStrong Revolv works:
- Austin Capital Bank gives you an installment loan, places the borrowed funds in a savings account opened in your name, and places a lock on those funds
- You make a single, fixed payment of principal and interest on the loan each month
- CreditStrongs reports your payment history to all three major consumer credit bureaus during the loan term, and you earn interest on your savings account balance
- Once you pay the loan in full, the lock is removed from your savings account, and the funds become available to you
With CreditStrong Revolv, you end up having a payment history for an installment loan (which accounts for 35% of your FICO credit score) and the money from your savings account.
Build Healthy Credit Habits
Challenging as it may be to start your credit profile, it’s only the first step. Whichever financial product you use, make sure to prioritize your obligations toward the lender to avoid damaging your score.
A default isn’t the only red flag future creditors might hold against you—any irresponsible behavior can stain your credit report. To avoid this, practice good financial management by following these tips:
- Only use credit when needed—Borrowed funds are meant to be a buffer or means of acquiring something important you can’t buy otherwise. Stick to such necessary purchases and keep your credit utilization low to show the lender that you have a firm grasp of your finances
- Make payments as soon as you get paid—Whatever your source of income, make payments as soon as you can afford to. Don’t wait until the due date, as you never know which unexpected costs might make you miss it. Pay off at least the minimum amount or preferably more to minimize the interest
- Don’t apply for credit haphazardly—Opening too many credit accounts or making unnecessary hard inquiries shows that you have a constant need for funds beyond your income. This is a significant red flag, so only seek credit when you don’t have another option
- Monitor your credit profile—Keeping track of your credit profile gives you insight into how your behavior impacts it. Request a credit report at least annually to ensure you’re on the right track
Ask a Parent For Help
Source: Kindel Media
Adding a child to their card isn’t the only way parents can support their children’s credit. Asking them to be co-signers or joint account owners can also help, so explore the available options to find the most effective one.
Some parents might be hesitant to participate in their child’s credit profile due to the many risks to their own financial well-being. Not all teens are responsible enough to be entrusted with access to borrowed money, so providing it can do more harm than good.
The good news is that there’s a secure and safe way for parents to support their children’s financial future—FreeKick.
Parent-Sponsored Credit Building by FreeKick
Powered by Austin Capital Bank, FreeKick combines a Federal Deposit Insurance Corporation-insured (FDIC-insured) deposit account and credit-building services to let parents establish and improve their child’s credit profile.
Parents can get started in three simple steps:
- Make a Deposit—Parents go to FreeKick.bank to choose a plan and create an account
- Set It and Forget It—When the account is open, FreeKick will start building 12 months of credit history for the child with no ongoing actions needed from the parent
- Keep Growing—When the 12-month cycle ends, the parent can renew the account for another 12 months or cancel it and get 100% of their deposit back
FreeKick offers three plans based on a one-time FDIC-insured deposit:
|FDIC-Insured Deposit Amount||Cost|
The child starts building a credit history as soon as the account is activated. The account uses an interest-fee credit builder loan to build credit for the child. No one can access the credit builder loan funds as they’re purely for credit-building purposes, so there’s no risk of late or missed payments or similar issues.
If the child is a legal adult (18 or over in most states), FreeKick will immediately start reporting their payment history to the three nationwide credit bureaus (Equifax, Experian, and TransUnion). FreeKick can also build a credit history for minors (typically 14–17), which will be reported once they become an adult because credit bureaus only accept reporting for adults.
Parents can close the account at any point without penalties. Still, if the parent closes it before the child is of legal age, no credit history can be reported for the account.
FreeKick’s Credit Profile Monitoring for Teens and Young Adults
Children typically don’t concern themselves with dangerous matters like identity fraud, but one in 50 fall victim to it each year. Most children’s identities aren’t monitored by any institutions until they reach their late teens, which gives criminals a chance to use their private information for synthetic identity fraud.
In synthetic identity fraud, the perpetrator combines a child’s Social Security number (SSN) with a fake name, address, and other information to forge a new identity and open credit accounts using the child’s SSN. They disappear without paying, leaving the child’s SSN connected to significant debt.
Enjoy the benefits of easy and secure credit profile building and monitoring—create a FreeKick account.
Featured image source: Liza Summer