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 and make your life unnecessarily difficult.
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, or credit bureaus, if you will, 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, your driver’s license, and your 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.
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 which kinds are the best for building credit.
But first, here are two words of caution.
First – know that these credit score rules don’t necessarily make sense. Like many things in life, it’s all just a game. To make your life go smoother, you need to win at this game, no matter how arbitrary it may seem at times.
Second – 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 your rent payments reported to the credit bureaus
- Get your bills reported to the credit bureaus
- Get credit cards and use them smartly
- Get a credit builder account
1. Get Your Rent Reported to the Credit Bureaus
Normally, you can only build credit by getting loans or credit cards, because those are the only financial products that report payments to the credit bureaus. If you were to go back, say, 10 years in time, the paying of normal bills was not an activity that would help your credit.
Which is kind of messed up, if you ask me. A responsible person typically avoids unnecessary debt and pays their bills on time. But doing this will actually not help you build credit. (Remember how I said that this stuff doesn’t always make sense?)
Fortunately, there are some new products out there that help you build credit without getting into debt. The following companies will report your rent payments to the credit bureaus, so that simple paying rent will help you build credit:
2. Get Your Bills Reported to the Credit Bureaus
Hopefully you don’t have too many bills at this point in your life. But I’m guessing that you probably have a cell phone bill, and maybe an electric bill or other type of utility bill.
Using Experian’s free new service, Experian Boost, you can get these type of bill payments reported to the credit bureau Experian.
According to Experian’s website, “For the first time, Experian Boost allows you to improve your credit scores and build credit history using utility, telecom and Netflix® bills you pay every month.
“Experian Boost works by connecting to your bank account(s) to find qualifying on-time bill payments and, with your permission, adding those payments to your credit file. The process takes about five minutes, and you’ll see any changes to your credit scores instantly.
“Most people who try Experian Boost see their credit scores improve immediately.”
It doesn’t get better than “immediately” and “free”. Since Experian Boost doesn’t report missed or late payments on your credit report, there’s literally no downside to signing up for it.
3. Get Credit Cards and Use Them Smartly
This option is the oldest trick in the credit book, and frankly, the most tried and true. But if you’re the type of person who has little financial discipline, then avoid it.
If you don’t have any credit, you’re not going to be able to qualify for a credit card. So how can you get one?
There are two options to get a credit card, for people with no credit:
- Get a secured credit card
- Become an authorized user of someone else’s credit card
“Secured” credit cards were designed specifically for people who want to build credit. The way it works is that you hand over a bunch of cash to the bank, and they then give you a credit card. Your line of credit is “secured” by the money that you gave them.
The amount of that credit line is equal to the amount of money that you gave them. So, if you give them $500, you will get a credit card with a credit limit of $500. If you deposit $3,000, your credit limit is $3,000. And so on.
Typically, the lowest amount that you can deposit to get a secured card is $300.
Unfortunately, the bank will keep that deposit forever. While it’s not fun having to put up that money, it’s a proven way to build credit.
A credit consultant that I worked with recently advises all of his clients with no existing credit to get 3 secured credit cards, from one of the following banks:
- Wells Fargo
- Bank of America
Get one secured card from each of them. (Not multiple cards from the same bank.) For whatever reason, he claims that credit card payments from these top tier banks give your credit score an extra boost that lower tier bank cards don’t give.
The other option for building credit is to become an “authorized user” on someone else’s credit card. The way that this typically works is that you apply for a card under their account, and then you actually get your own card to spend with.
They see everything that you spend on and do with that card. They can cancel your user status at any time.
Authorized users are typically on their parent or spouse’s credit card account. If your parents are willing to make you an authorized user, this could help your credit.
Since any payment made on that account will report on your credit report, you would want to make sure that the person whose account you use is responsible. In other words, you wouldn’t want to become an authorized user for someone who regularly pays their credit card payments late, for example. Because then those late payments will mess up your credit, instead of improve it.
Which brings me to my next point: how to smartly use a credit card.
If you get a credit card, but don’t use it, it won’t help your credit much. You need to a) make on-time, monthly payments on it, and b) keep a low balance for it to build your credit score.
Since “payment history” is the biggest portion of your credit score (35%), and “amount owed” is your second biggest portion (30%), then you need to get these two things right.
The ideal is to keep your credit balance below 10% of your credit limit to maximize your credit score. Definitely keep it below 30%. Under no circumstances should it go above 50%.
For example, if your credit limit is $1,000, then keep your balance no higher than $100. If your credit limit is $500, try to keep it to less than $50. And so on.
But since you need to make payments to build up your payment history, you’ll need to be using your card so that you have something to pay off.
It doesn’t make much sense, I know. But just fill up your tank with gas using your credit card once per month, or put your $10 per month gym membership on your credit card. Then religiously pay it off.
If you do this for 12 months, you will establish a credit score, and it will go up dramatically. Do it for 24 months, and you will have top tier credit.
It really is that simple.
About 9 years ago, I got a secured credit card to build my credit, but I didn’t really use it most of the time. And the first time that I did use it, I maxed out my $600 credit limit completely. Don’t do this!
4. Get a Credit Builder Account
This one isn’t necessary if you do all of the above, but it’s great if you want a super-strong credit profile. Anyone who wants to buy a house should do this.
Here’s why: you need an installment account on your credit report.
There are two types of credit: revolving accounts and installment accounts. Credit cards are the most common example of a revolving account. You have a credit limit, but you don’t have to use all of it. You can use as much or as little of that credit amount as you want, as long as you make the minimum monthly payment.
Installment accounts are traditional loans, like home loans or car loans. There is a loan for a fixed amount, with a fixed payment over time. Once the loan is paid off, it’s paid off forever.
You need both types of credit accounts to get a maximum credit score. If you don’t have a car loan, or have never had one, then a credit builder loan is a good way to get an installment loan in your credit history.
Credit builder accounts work just like personal loans. You get make monthly payments for a set period of time, until your account is paid off, just like you would with a car loan. But once that payment period is done, you actually have some savings left.
For example, let’s say that you get a credit builder account for $1,000. The term is 24 months. You make monthly payments of $50 per month over that time period. Each one of those payments gets reported to the credit bureaus, so they build your credit score.
Some of that $50 monthly payment goes to paying the credit builder account company, and some of it goes into savings for you. When you’re done, you’ve accumulated some savings. So it’s a way of building credit without getting into debt.
Credit Strong is a great company that offers this product. Their main competitor is Self. I would recommend Credit Strong, if this is an option that you’re interested in, since they really treat their customers right.
Plus Credit Strong is owned by an actual bank, officially registered with the government and well rated. They report to all of three of the major credit bureaus, so it’s all very above-board and effective.
I’m a money nerd, small business owner, and personal finance blogger. After job-hopping and ruining my credit in my early 20s, I decided to get serious about money and my career. Now I have top-tier credit, a successful small business, and am on a path to financial independence.