Good credit is crucial to unlocking many financial opportunities in life. When you have a great credit score, you can get lower interest rates on car loans, credit cards and mortgages. Some employers and landlords even check credit reports before they make a job offer or approve a resident application. While developing a solid credit history takes time, follow some of these tips on how to establish credit once you turn 18 to get started as soon as possible.
1. Understand the Basics of Credit
Make sure you understand the basics of how credit works. Your credit reports are maintained by three major credit bureaus—Experian, TransUnion and Equifax. It contains data on your current and past debts, payment history, residential history and other facts. This data is supplied by lenders, creditors and businesses where you have accounts.
The information contained in your credit report determines your credit score. Higher credit scores are more attractive to lenders and creditors. The factors that influence your score include:
- Payment history, which is whether you pay your bills on time
- Average age of accounts, which is how long you’ve had your accounts open
- Credit utilization ratio, which is how much of your open credit line you’re currently using
- Account mix, which demonstrates that you can responsibly manage multiple types of accounts
- Inquiries, which occur when you apply for new credit
As a new adult, some of these factors may not currently apply to you. However, they can all negatively or positively affect your score, depending on your behavior as a consumer. Educating yourself on credit now helps you avoid costly mistakes in the future.
2. Become an Authorized User
If you have a friend or family member willing to add you as an authorized user on their credit card, you can piggyback off their credit card activity to help establish your credit. Even if you don’t use the card, the account can still land on your credit report and potentially positively impact your score.
This method poses some risks to the primary cardholder and you, the authorized user. If you or the primary cardholder rack up too much debt or miss payments, that activity could end up damaging the credit of both parties.
You should also verify that the credit card company in question reports card activity to the credit file of authorized users. If they don’t, your credit won’t see any benefit.
3. Get a Starter Credit Card
Credit cards are one of the best tools around for building credit, but you might have trouble qualifying for one when you have no credit history. Luckily, there are a few credit card options for young people with little or no credit.
Unsecured Credit Cards: If you don’t have the money to make a security deposit, consider an unsecured credit card such as the Avant Credit Card. This card offers a process that presents you with a credit line based on your creditworthiness before you apply. It also has no penalty or hidden fees—a perfect fit for any young adult’s starter card. You do need at least some fair credit history to be approved, though.
Avant Credit Card
- No deposit required
- No penalty APR
- No hidden fees
- Fast and easy application process
- Help strengthen your credit history with responsible use
- Disclosure: If you are charged interest, the charge will be no less than $1.00. Cash Advance Fee: The greater of $10 or 3% of the amount of the cash advance
- Avant branded credit products are issued by WebBank, member FDIC
Card Details +
Secured Credit Cards: A secured credit card requires an upfront security deposit to open. Your deposit will typically equal your initial credit limit. For example, a $500 security deposit would get you a $500 credit limit. These cards are easier to qualify for, and you can use them to make purchases, just like traditional credit cards, while also establishing some credit history.
OpenSky® Secured Visa® Credit Card
- No credit check necessary to apply. OpenSky believes in giving an opportunity to everyone.
- The refundable* deposit you provide becomes your credit line limit on your Visa card. Choose it yourself, from as low as $200.
- Build credit quickly. OpenSky reports to all 3 major credit bureaus.
- 99% of our customers who started without a credit score earned a credit score record with the credit bureaus in as little as 6 months.
- We have a Facebook community of people just like you; there is a forum for shared experiences, and insights from others on our Facebook Fan page. (Search “OpenSky Card” in Facebook.)
- OpenSky provides credit tips and a dedicated credit education page on our website to support you along the way.
- *View our Cardholder Agreement located at the bottom of the application page for details of the card
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4. Make Payments on Time
Making timely payments is the most important thing you can do to build credit, as payment history makes up 35% of your credit score. This applies to credit cards, loans, utilities such as cell phone services and any other account that requires a monthly payment. No matter the account type, a late or missed payment that lands on your credit report can do significant damage to your credit score.
5. Maintain a Low Credit Card Balance
Your credit utilization ratio, or the amount of available credit you have tied up in debt, is another major contributor to your credit score. Most experts recommend keeping your credit card balances below 30% of the available credit limit. Ideally, you should pay your balance off in full each month to avoid interest and keep your utilization low.
6. Get a Loan
Getting a loan just to build credit is generally not a good idea, as you shouldn’t take on debt only for the sake of your credit score. But if you have a valid reason, such as needing a car or money for college, a small loan in your name can help you build credit.
As with credit cards, loans only build a good credit history if you pay them on time every month. You also want to ensure your creditor reports payments to the credit bureau. If you also have a credit card, getting a loan can help improve your account mix, which makes up around 10% of your credit score.
7. Monitor Your Credit Report and Credit Score
Now that you’re building credit, you need to monitor your report and credit score. Monitoring your credit is one of the best ways to learn what will positively or negatively impact your scores. It also helps you catch inaccuracies or signs of identity theft sooner.
You can check your credit report for free annually with each major credit bureau. As you review your report, look for any negative or inaccurate information that could be screwing up your credit. You can also check your credit score, updated every 14 days, for free at Credit.com.
8. Keep It Simple for Now
The more credit cards and loans you open, the higher your chances are of falling into debt. When you’re just starting out, you should probably play it safe and manage one basic credit card and/or small loan until you get the hang of things. Trying to manage too many debts at once could get you in over your head.
Over time, you can start to add other credit cards or loans to the mix, diversifying your credit profile and adding more opportunities to build credit. And because the age of your accounts affects your credit score, just keeping accounts open will help you build credit history in the long run. When you’re starting to figure out how to build your credit, do it slowly, carefully and with a constant eye on your statements and credit reports.