How To Start Credit History When You're 18

Summary: It's entirely possible - and smart - to establish your credit history when you're 18. Your top options are becoming an authorized user, getting a credit-builder loan or getting a secured credit card.


By Zina Kumok, Financial Health Counselor, Credit Counselor

Building a credit score is like developing good posture. Once you realize how important it is, you’ll wish you hadn’t waited so long to start. Every year, adults all over the country are denied loans, rental applications and even jobs because of a poor credit score.

That’s why young adults are in such a great position to get ahead. If you start working towards a robust credit history at an early age, you’ll be a step ahead of your peers. While they scrape between the couch cushions for coins, you’ll be well on the way to financial independence and stability.

Building credit may not be easy, but it is simple. Your top three options for establishing credit when you’re 18 are:

  1. Becoming an authorized user
  2. Getting a credit builder loan
  3. Getting a secured credit card

Building credit illustration

Why start building your credit at 18

The earlier you can start building your credit, the easier it will be to make the transition into adulthood. It’s hard enough navigating your way through life as a twentysomething without handicapping your financial potential.

Having a good credit score will also make it easier to buy a car, refinance student loans and eventually buy a house.

Can I get a credit card at 18?

Looking to learn how to start building credit at 18? The short is answer is yes, but you will need to show proof of income or that you have assets (money in the bank) to be able to repay whatever you charge.

When you’re 18, you have few reasons for lenders to trust you. You may have little or no income, you don’t have any real assets and you might still be relying on your parents.

In short, any reliable business won’t have a reason to lend you money. That’s why you need a credit history. A solid credit history shows that you’re financially responsible and have a good score. Lenders want to know they can trust you to repay them on time and in full.

A credit score is a numerical representation of your credit history, from 300 to 850. The higher your score, the more reliable you appear as a borrower. If you’ve never used any form of credit line, you’ll have no credit score at all.

How fast can I build credit?

Looking to build credit fast? Plan on three to six months to establish your credit score, according to Experian, one of the credit bureaus. That may feel like a long time when you’re trying to get financial things done, but in the context of your life, it’s not so long. Building excellent credit takes time and there’s nothing you can do overnight to get to a high credit score.

How will lack of credit inhibit me?

Without a credit history or score, you might struggle to rent an apartment, sign up for a cell phone plan, get an auto loan, or even hook up utilities. Many of these services will require a deposit if you have no credit - and some may deny you outright.

Teens who want to move out and become financially independent need this advice the most. It’s not uncommon for a landlord to run a credit report. If you don’t have that, they’ll either ask for a co-signer or deny your application.

What risks do I face as I try To build credit?

It really depends on which tactics you take to establish your credit score. As an authorized user, your only risk is from your parents’ use of credit (assuming you didn’t get your own card). With a credit builder loan, the risk comes from failing to make the payments on time. With a secured credit card), you have dual risks of using too much of your credit limit and making late payments.

The bottom line is that to reduce risk you need to be disciplined - don’t overextend yourself and make sure you make your payments on time to your credit card company. Here are your top options:

1. Become an authorized user

If your parents have respectable credit scores, you can ask them to add you as an authorized user on their credit card (this is also known as piggybacking credit). As an authorized user, any credit line activity that happens on the card will be reported on your credit report. If your parents make on-time payments and follow good credit procedures, your score will grow.

Before they add you, have them call the credit card provider to verify that they report activity for an authorized user. While most major credit card issuers do, it’s still good to double check.

Only use this strategy if you’re completely confident in your parents’ credit habits. If they rely too heavily on credit or fail to make on-time payments, you could end up in a worse financial situation than before you started building credit.

Your parents may be hesitant to add an authorized user if they suspect you’ll run up a huge credit balance. Tell them you don’t need a copy of the card, because you’re just trying to build credit.

If you go the route of becoming an authorized user, the credit card may quickly report to the credit bureaus, but the amount of time it takes for the various credit bureaus to update their records and establish a credit score can vary.

2. Take out a credit builder loan

A little-known way to build credit without a credit card is the credit builder loan. Credit unions and banks offer credit builder loans to customers who want to build credit without taking out a loan or opening a credit card. Self provides credit builder loans online to residents in all 50 states.

A credit builder loan works differently than a traditional loan. When a customer borrows a regular loan, they receive the money up front and then repay the loan over time. If you take out a mortgage, you get the money to pay the homeowner immediately and then repay the bank over several decades.

With a credit builder loan, the bank doesn’t give you the amount right away. The lender places the amount you borrowed in a savings account or certificate of deposit (CD) that you don’t have access to. Every month, you make a payment until you’ve repaid the loan. Then, the lender gives you access to that money, which might or might not have accrued interest, depending on the lender and their policy.

Most banks have a one or two-year term for these loans, and interest rates range from 5% to 16%. Credit builder loans are usually small, maxing out at $1,000. Lenders who give out credit builder loans report the activity to credit bureaus, who are responsible for establishing your credit history. That helps to build your credit score.

To be eligible for a credit builder loan, you usually need the following:

  • A social security number
  • Phone number
  • Email address
  • Be a permanent US resident

You’ll also need some proof of income to qualify, but teens with student loans or part-time jobs may be eligible as well.

3. Sign up for a secured credit card

If you have some form of income, you can sign up for a secured credit card. A secured credit card requires a deposit matching the credit limit, which serves as collateral to the card provider, but otherwise functions exactly like a normal card. The interest rate may be slightly higher and there are fewer rewards, but it’s a great option for someone who can’t qualify for a traditional card.

To establish a good credit score with a secured card, use it sparingly and pay your bill before it’s due. Never keep a balance of more than 30% of the card’s credit limit.

Some card providers will give you access to credit score tracking software so you can monitor progress. After a few months of using a secured card responsibly, you might be upgraded to a regular credit card. When that happens, you’ll get your deposit back.

Bonus: Monitor your spending

Once you qualify for a regular card, enjoy the benefit of rewards programs and a lower interest rate. Just remember to keep following responsible credit habits, pay your monthly payment, and don't open too many new lines of credit, as that can make your credit score drop.

When you monitor your spending closely, it reduces your chances of going over your credit limit, or having a credit card balance you can’t afford to repay by your due date, which could otherwise hurt your credit.

The best way to spend responsibly with a regular credit card is not to spend more than you can afford to repay. If you have a credit limit of $1,000, don’t rack up an $800 balance each month if you can’t afford to pay it off. To ensure you can pay off your balance each month, make sure to stick within a range that you’re able to afford.

Especially since using too much of your credit card limit each month could hurt your credit score.

About the author

Zina Kumok is a Financial Health Counselor and Credit Counselor, certified by the National Association of Certified Credit Counselors, who writes extensively about personal finance.

Written on October 23, 2018

Self is a venture-backed startup that helps people build credit and savings.
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Disclaimer: Self is not providing financial advice. The content presented does not reflect the view of the Issuing Banks and is presented for general education and informational purposes only. Please consult with a qualified professional for financial advice.

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