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If you’re a normal person, your parents didn’t help you build credit as you were growing up. Most 18 year olds don’t have credit, which can make life quite difficult.
Here’s how you can build your credit in record time, even at the tender age of 18. This methodology applies to anyone who doesn’t currently have a credit score, regardless of their age.
And I’m assuming that you already understand the importance of having good credit.
Building credit is easy, Daniel-san, if you know how to do it. Wax on, wax off.
How to Build Credit at 18:
- Establish a clear credit identity
- Get credit accounts
- Make on-time monthly payments
- Keep your balances low
That’s it. There are but four steps to awesome credit.
The inverse is also true. Do the opposite of these four things if you want to totally mess up your credit score and make your life unnecessarily difficult.
1. Establish a Clear Credit Identity
The first section on your credit report is about your identity. And if your identity is the same across all of your credit reports and credit applications, then your credit will be much more useful for you.
There are three organizations, called credit bureaus, that keep your credit records. Your name and physical address need to be the same across all of them.
If you are in college, temporarily traveling, or in the military, then use your parent’s address. It’s much easier to keep your credit profile up-to-date if you don’t have to change it all the time.
Your name and address should be the same on your bank account records, driver’s license, and credit reports. Like so:
1234 Quiet St
Springfield, IL 62629
Make a decision now on how you want it to look. If you include a middle initial, ALWAYS use the middle initial. If you have a hyphenated last name, ALWAYS use a hyphenated last name.
On your address, decide if you will write out the street name (like Avenue vs. Ave.), and decide if you will use an apartment number or suite number.
Here’s what not to do. Don’t use your name and address differently in different places. For example:
John L Doe
1234 Quiet Street
Springfield, IL 62629
Or worse yet:
John Louis Doe-Chandler
1234 Quiet St. Apt. 15
Springfield, Illinois 62629-3148
You get the point. The reason for this is that records are recorded by computers in databases.
And when your credit profile is used for anything – be that a loan application or a credit application – you want it to automatically find a match for you.
Even though a human could easily piece together these different types of addresses and names, it makes it very difficult for computers to find matches. And if they can’t find you, you’re quite likely to get denied.
2. Get Credit Accounts
This is where the fun begins. According to the FICO credit scoring system (ie the credit score system that over 90% of banks and lenders use), these are the factors that determine your credit score:
Accordingly, to get a high credit score, you need to:
- Establish a payment history
- Owe reasonable amounts of debt
- Maintain credit over long periods of time
- Keep a mix of different types of credit
- Not open up too much new credit
To do all of these things, you need to have credit accounts. I’ll show you which kinds are the best for building credit.
But first, a word of caution.
You must NEVER use your credit cards to buy things that you can’t afford. Never, ever, ever use a credit card to buy something if you don’t already have that money in your bank account.
I don’t care if you lost your job, don’t have a job, or are in the worst financial situation of your life. Don’t use your credit card if you don’t have the money to pay for what you’re buying.
From now on, for the rest of your life, you must swear to me this blood oath: “My credit cards are credit-building tools only.”
Now that we have that out of the way, here’s what you need to do: Get three credit cards and one credit builder loan.
This is because credit cards are revolving accounts, and you need three of them to build credit. You need a credit builder loan because it is an installment loan. You need one installment loan to build credit also.
The problem with building credit for the first time is that you won’t qualify for normal credit cards or loans.
How can you build credit if no one will approve you for a loan?
Fortunately, there are several “starter” or “credit builder” credit cards that you can use to get started.
Student Credit Cards
Student credit cards are a great intro to revolving credit. Since you’re still under the age of 21, you’ll have to fill out and sign a paper credit card application to get this in most cases.
It’s better than a secured card because you’re not forking over a couple hundred for a security deposit.
You’ll start with a small unsecured credit limit (around $250 to $500) that you can use to build credit history.
Usually, after a few months of on-time payments, the credit limit goes up. Use this card for important things like your books, or an emergency. Remember your oath.
Once you make a purchase on the card, pay it off on or before the due date. It’s meant to help you learn good credit habits so it shouldn’t be used to cover your budding interest in being a social media influencer.
Having a hard time getting approved for an installment loan or a student credit card?
You may want to seek some help from your parents. If they have a good credit score, they could help by adding you as an authorized user to one of their credit cards.
That doesn’t mean you’ll get access to that credit card unless they want you to. What it does mean is you’ll have the credit history of that card added to your credit report.
That helps you build good credit. While this tactic isn’t as strong as being a primary account holder, it gets your foot in the door.
The hope here is that your parents will use this as an opportunity to teach you some of their healthy credit habits, like paying bills on time, not spending more than you have, and maintaining a low credit utilization ratio.
Secured Credit Cards
A secured credit card isn’t always the best option. When you’re in a pinch to build your credit, they can work with some discipline.
As mentioned earlier, secured credit cards require a down payment (typically $200 to $300), which makes up your credit limit.
The problem is, that’s not enough of a credit limit to keep your credit utilization under 30%.
Even when using the card to cover small responsible purchases, a single purchase of $100 on a $200 credit limit means your utilization rate is at 50%. That lowers your credit score instead of raising it.
You might be wondering why you have to go into debt to build credit, but you don’t have to.
Instead of paying interest on credit card debt and trying to balance the complexities of a utilization ratio, you could try CreditStrong Revolv instead.
CreditStrong’s Revolv account is a revolving credit account similar to a credit card without the possibility of racking up debt.
You start with a $500 credit line and you choose how much of a payment you want to make each month. You don’t get a card, so you can’t make purchases.
Each payment you make gets reported to all three credit bureaus and is placed into a locked savings account.
After three consecutive, on-time payments they’ll even raise your credit limit by $100. Pay 0% interest, don’t go into debt, and build savings? Sounds like a win.
Credit Builder Loans
You don’t just need revolving accounts to build your credit, you need installment loans too.
That’s where credit builder loans come in. A credit builder loan is an installment account where instead of getting the money upfront, you get it at the end of the loan.
Meanwhile, you make set monthly payments on the loan which get reported to the major credit bureaus.
At the end of the loan, you get the total amount of the loan back plus any savings interest. If you made your payments on time, you’ll also walk away with a better credit score.
Several companies offer credit builder loans, but these are the ones that stand out:
Lucky for you, there are a few new options that your parents didn’t have when they were 18. They’re new to the market, but these alternatives have already helped tons of people increase their credit scores.
You probably thought you couldn’t get credit for paying your rent. With BoomPay, you can.
For $2 a month, BoomPay connects to your bank account and tracks your monthly rent payments. They use that information to report your rent to all three credit bureaus.
Want to build credit by paying for your streaming services too? Get Grow Credit.
They give you a revolving credit account that connects to your bank account so every time you pay a bill, it shows on your credit report. Who knew you could build credit by catching up on your shows?
3. Make On-Time Monthly Payments
By far, this is the most important thing you can do to build your credit. Your payment history makes up 35% of your overall credit score.
Pay your bills on time, every time. Put it on easy mode by signing up for autopay. Most companies even offer a discount when you do.
To make sure all of your payments are being reported correctly, monitor your credit reports with free services like Credit Karma or Credit Sesame.
They’ll keep you up to date on your payment activity and even provide helpful alerts and suggestions to improve your credit score.
4. Keep Your Balances Low
The second biggest thing you can do for your credit is to keep your revolving balances low. While most credit experts suggest keeping your credit balances below 30%, you’ll find the best success when you keep them at 10% or less.
The easiest way to do that is by not using credit cards for everyday purchases. That’s the tricky part.
Don’t use your revolving credit for unnecessary things, but you also need to make monthly payments on them to impact your credit. Once you find the balance, you’ll be golden.
When you’re just getting started, trying to build credit at 18 might seem difficult, but it doesn’t have to be.
Keep your credit identity consistent, get credit accounts, and be responsible with them. Then use some of the credit-building tools your parents wish they had!
To continue learning about credit, see the following articles in the series:
- Why did my credit score drop for no reason?
- Sample Letter to Remove Closed Accounts From Credit Report
- How to Write a Goodwill Deletion Letter to Remove Late Payments
- How to Increase Your Credit Score to 800
- The Best Way to Check Your Credit Score
- The Best Credit Building Apps
You may also be interested in these other articles:
- The FICO vs Vantage Credit Scores
- Why is Credit Important?
- How to Build Credit at 18
- Is 670 a Good Credit Score?
- How to Build Credit with Bad Credit
- How to Build Credit Without a Credit Card
I am a Certified Lending and Credit Specialist and first gained experience fixing my own credit. My own credit scores went from the 500s to the 800s in one year. I studied economics at The George Washington University and now have my own business working with financial technology companies. I manage my own investments and live in Salt Lake County, Utah with my wife and two kids.