Obtaining credit history at a young age not only provides the youth with beneficial opportunities to kickstart their life; the fundamentals of good credit early on establish financial wisdom that will serve the future in various ways, including financial stability and excellent spending habits. Rewards are enormous, but how do we start building good credit at only 18 years old?
Our comprehensive step-by-step guide will give you a good insight into the credit-building world and key terms necessary to better understand the dynamics of credit.
What is credit, and why is it important?
Young financial consumers more often than not fall into the trap of unnecessary purchases, setting the ground for poor spending habits and the inability to control debt. Lack of adequate financial literacy is a recipe for disaster. Credit is often misinterpreted, and without concrete life goals, young minds do not pay attention to the flashing warning signs, such as gradually decreasing credit score.
So, what is credit? If you were looking to start your adult life by upgrading your car, but your financial resources are insufficient, your next thought would be to borrow money from a reliable source. Your parents might not be an option, and let’s be honest, we’re adults now – we want to become more independent, and taking our parents’ money is certainly not it. You might be considering credit.
Credit, in simple terms, is a way to gain access to financial resources, borrowing money or purchasing goods and services, recognizing that everything must be paid off within a specified amount of time. You might apply for a credit card or loan through a bank, credit lending company, credit unions, mortgage, or car lenders, to name a few. And while you do so, there is a set of factors that you might want to consider, such as offered interest rates or repayment conditions.
Credit, whether we like it or not, is an essential part of our life. Not only does it give us access to material goods, potential employers often perform a credit check before hiring. You might find yourself in search of an apartment for rent, and guess what? Your credit may be a determining factor in whether or not you qualify. Not to mention possible emergencies that may happen in the future, or when you are ready for the next life stage – buying a house. You don’t have to rely entirely on credit in every aspect of your financial life, but having a good credit history is a kickstart that will eventually pay off.
Let’s get started!
11 Steps to Building Your Credit History Like a Pro
1. Get a Starter Credit Card
This one is a major step. It will create your unique credit report that you will either love or hate depending on your use or abuse.
Getting your first credit card is an exciting and often confusing endeavor. And although there are options to apply for an independent credit card at 18, you must have an income established that will help lenders determine whether or not you are capable of repaying the debt. The process gets less complicated when you turn 21, but before that, having a parent co-sign is a good idea. It will help you get better terms and conditions and make the process easier.
Use your new credit card with caution, spending minimum, and repaying right away or definitely before the due date. Another good way is to implement micropayments, which we will discuss later. If none of the options work, and you are unable to get a regular credit card under your name, it’s time to consider a secured credit card.
2. Apply For a Secured Credit Card
A secured credit card minimizes the risk of abuse. Your credit limit is whatever you can deposit when applying for a secured credit card. It’s a good starting point, expediting the ability to get a regular unsecured credit card. Being timely with payments and maintaining your account in good standing will profit your track record and reward you in the near future with other credit possibilities. Again, handle your secured credit card with care. Although you are spending your money, your secured credit card is still a credit card, and its potential misuse can have damaging effects on your credit score.
3. Become an Authorized User
Another option to become visible to lenders in a credit-building process is to become an authorized user on someone else’s credit card account. It’s a great alternative when you are unable to apply for a regular credit card, or an unsecured credit card is not an option. The advantage of becoming an authorized user is that you can collect rewards without ever having access to the account. A trustworthy credit card user with a long credit history can help you establish your credit existence without the hassle of credit management.
4. Open a Student Credit Card
Student credit cards are designed to help students enter into the financial world with ease. They often have lower credit limits, which may not be consumer-friendly, but lets you manage your debt without hassle. After all, we want to build our credit, not our dues. It’s essential to pay attention to the interest rates offered by creditors when applying for a student credit card and to pay off the charges promptly.
Student credit cards often come with rewards for making payments on time. It’s a good tactic that may teach students good spending and credit management habits.
5. Set Up Automatic Payments
It’s a no-brainer. Automatic payments make life much more comfortable, especially for students micromanaging many tasks simultaneously. Forgetfulness is not uncommon among the college population, who are entering into an exciting new adult world. Setting up automatic payments for your credit cards is a great way to ensure all your debt is paid off on time. The habit of late payments is the first step to damaging your credit, and all the efforts you put into building your credit may be squandered in an instant.
6. Consider Micropayments
Debt management can become a struggle for new inexperienced credit card owners. We may find ourselves spending more than we can afford, leading to a higher credit utilization ratio, which can significantly affect your credit score. Micropayments are a method of reducing debt by making frequent small payments toward your balance. That way, you will avoid late fees, pay less interest, and minimize your balance faster, even when money is tight.
7. Maintain Good Credit Utilization Ratio
Building credit at a young age requires basic knowledge of the credit system, necessary to avoid common mistakes that may potentially damage your credit. Generally, your debt should stay below 30 percent of your total revolving credit. The percentage of your total debt is the calculated credit utilization ratio. Maintaining a good credit utilization ratio is crucial in the credit-building process. The ratio is calculated by the entire balance on all of your credit cards divided by the sum of your credit limits on all of those cards. For instance, if your total revolving credit equals $1000, and your current debt is $800, the credit utilization percentage is 80, which is a very high number requiring urgent attention.
8. Handle With Care – Monitor Your Spendings
Every credit card needs to be handled responsibly to avoid the financial burden and substantial credit damage. Upon approval, keep track of your spendings and payment due dates to make the managing process easier. Do not spend more than you can afford, apply the micropayment method discussed above, and maintain a low credit utilization ratio. If possible, make small purchases that you can immediately repay. Use your credit card with caution, and you’ll be on an excellent way to build outstanding credit.
9. Apply For a Small Loan
Satisfactory credit history consists of various types of credits that go beyond a credit card. If you are ready for the next step, consider applying for a small loan to enrich your borrowing history. We have established that being highly indebted is not the best indicator for creditors. However, proving to lenders that you can handle more debt is also essential to building a good credit history.
A small personal loan to cover sudden expenses, such as car repair, is an excellent way to enhance your credit building process.
10. Learn the Basics of a Credit Report
When it comes to building credit, doing is as important as knowing. Understanding the basics of a credit report is an essential component that will reward you in the long run. A credit report consists of your personal information, such as your full name, birth date, and social security number, as well as all credit accounts with their current condition, all collection items, public records, and credit inquiries.
The credit accounts section shows everything related to the account in question: the credit limit, the type of credit, payment history, account balance, opening and closing date, and the name of the creditor.
Collection items include all the debt that is in default and, as a result, has been turned to a collection agency.
The public records section consists of all foreclosures, bankruptcies, or overdue child support.
Credit inquiries are all your attempts at getting credit.
11. Check Your Credit Report Regularly
Checking your credit report regularly helps you monitor your current credit condition. You can gain access to the information lenders see every time you apply for a loan or credit. You are entitled to a free annual credit report from all three major credit bureaus: Equifax, TransUnion, and Experian. Inspecting your credit report on a regular basis allows you to check for any inaccurate entries, such as expired collections, accounts that are not in your name, or invalid balances. Some of the items that damage your credit may be subject to dispute.