The modern economy is credit-based. You will require a lender to issue you a line of credit if you want to obtain a mortgage for a home, a student loan to pay for college, or even merely use your credit card to buy lunch.
Additionally, you must be deserving of that credit line. Your three-digit credit score, the secret to your financial well-being, determines your creditworthiness. That is why you must focus on having good credit from the beginning of your adulthood. Stay tuned to find out how to start building credit at 18.
What Is A Credit Score?
Your borrowing and repayment history, and how frequently you’ve looked around for credit, all factor into your credit score, which is also occasionally referred to as your credit rating.
Lenders will decide whether to lend to you, how much, and at what rate of interest based on this rating and their risk standards.
All the data in your credit report goes into calculating your credit score. A credit report provides a thorough account of your financial background. Because your credit report will accompany you throughout your adult life, it’s crucial to track what’s there. Creditors (banks, credit unions, and loan providers) view and evaluate all of this information to decide whether or not you’ll be authorized for mortgages, credit cards, loans, or even a mobile contract.
How Does Credit Work?
Today, the Fair Isaac Corporation (FICO), which employs a scale from 350 to 850, is the most popular credit-scoring model. The following weighted criteria are taken into account by a proprietary algorithm when calculating FICO scores:
Payment History
Your payment history is a record of the way you’ve handled payments on all of your credit accounts, including loans and credit cards. It is the most important element that impacts your credit.
Lenders can see from your payment history whether you made on-time payments, missed any, or were reported to collections. For instance, if you frequently skip them, your score declines, and lenders view you as a risk.
This element is crucial enough to account for 35% of your FICO score.
Amount of Debt
How much total debt do you have, and in particular, what proportion of your available credit is represented by this amount? Less than 30% credit utilization can be favorable.
Length of Credit History
Lenders favor candidates with a track record that spans several years and demonstrates consistent financial responsibility. The majority of bad material stays on your report for seven years, however, certain information may stay for ten years.
Recent Credit Utilization
A lender may view the sudden application for or opening of numerous new credit accounts as a possible risk. A “hard inquiry” mark, which appears on your credit report for two years, is sometimes the consequence of a new credit application. Only those inquiries from the past year are taken into account for determining a FICO score.
Credit Mix
Your credit report’s “credit mix” describes the different kinds of accounts that make it up. Assessing your mortgage rate is crucial as factors like loan type and credit score significantly impact the interest rates you’ll receive, emphasizing the need for a good credit profile. 10% of your FICO score is based on your credit mix. Your credit mix may comprise revolving or installment loans like credit cards, school loans, auto loans, and mortgages, among other credit products. If your credit history is bare, the credit mix may have a massive effect on your credit score.
Why Is It Important to Keep A Good Credit Score?
Having good credit may be the deciding factor in whether you are approved for a mortgage, vehicle loan, or school loan. On the other side, people with bad credit will find it more difficult to obtain a credit card with a low-interest rate and will find borrowing money for any purpose more expensive.
Even if you aren’t looking for a loan, having good credit can still be helpful. Employers, insurers, and landlords regularly utilize credit information as a litmus test to determine a person’s dependability and responsibility. Having bad credit can make you seem like a dangerous bet.
How to Start Building Good Credit At 18
To become an adult, you must start building credit since you are 18 years old. You can start building credit by following these suggestions.
Get A Credit Card
Credit can be built up very quickly by using credit cards. If you lack a credit history, it could be difficult to get approved for some cards. But, there are dedicated credit cards for first timers, such as low rate or secured credit cards.
If you are underage, you can become an authorized user, which allows you to take advantage of the account’s history. The parent, friend, or family member you select must have solid credit and sensible spending habits because they will be responsible for making payments.
By acquiring a secured credit card, you have the opportunity to build a credit history. This particular type of credit card requires a security deposit or an item of value. Your credit limit is determined by a $200–$500 cash deposit. These function similarly to regular credit cards.
Secured cards are far simpler to receive even if you don’t have much of a credit history because the credit card company doesn’t incur any risk, unlike with a regular unsecured card.
Secured cards are far simpler to receive even if you don’t have much credit history because the issuer doesn’t incur any risk, unlike with a regular unsecured card.
Get A Mobile Contract or Store Card
Mobile contracts and other smaller kinds of borrowing are excellent ways to start building credit. Compared to applying for a credit card or loan, you might have better chances of being accepted. Paying your monthly bills on time and in full will show that you can manage your money responsibly.
Get A Student Loan
If you intend to enroll in college or university, you may need a student loan to cover your tuition and other costs. Some financial organizations provide specialized student loans. These loans, which are for students, are frequently simpler to obtain, even if you don’t have a credit history. As long as you pay your bills on time, they can aid in building a solid credit history and score.
Make sure your payments are accurately reflected on your credit report if you are repaying a school loan. Your credit score might be lowered by inaccurate information on your credit report. Downloading and routinely reviewing your credit report is advised. You can dispute student loan errors with the credit bureaus if you find them.
Get A Credit-Building Loan
Community banks and credit unions offer credit-building loans. The money you borrow when you take out a credit-building loan is in a savings account that you can retrieve after the loan period. Pick a small loan amount because you’ll need proof of income to verify that you can make the installments.
The financial institution informs the credit reporting agencies of your timely loan repayments. It will help improve your credit, and you’ll have some money saved up after the loan period, so everything works out well.
Make Sure to Constantly Check Your Credit
On websites like My Credit File and Check Your Credit, you can get a free copy of your credit report.
You’ll be asked to confirm details, such as your: name, date of birth, address, license number, etc. Within ten days, you should receive a copy of your credit check.
Make Your Payments On Time
Making on-time payments once you’ve acquired a line of credit, whether through a loan, credit card, or another method, is one of the simplest ways to keep raising your credit score. All other bills are the same. One of the most crucial elements in correctly establishing credit is that monthly obligations are met and payments are on time.
Spend What You Can Afford to
Use your credit card only in situations where you would use your debit card. It is advisable to begin using a credit card to pay for one or two monthly payments or make regular, minor expenditures like groceries or gas. Make sure you pay it off each month.
Organize Recurring Payments
Establishing automatic recurring payments for your regular expenses, such as internet or streaming services, is the ideal approach to making sure you never forget to make a payment. Making on-time payments a priority is wise because your credit score is 35% based on your payment history.
FAQs
What Is Considered A Good Credit Score?
Depending on the scoring mechanism used to determine them, credit score ranges and what they signify will differ, but they are typically comparable to the following:
- Poor: 300–579.
- Fair: 580–669.
- Good: 670–739.
- Very Good: 740–799.
- Excellent: 800-850.
How Long Does It Take to Establish Good Credit At 18?
Since a credit bureau needs time to track your credit activity if you’re just getting started, it can take an average of six months to acquire your initial credit score. Generally, there are no shortcuts, and raising a credit score to an “excellent” rating can take years.
Can You Fix A Bad Credit Score?
Your credit score cannot be fixed; rather, it merely captures your credit position at the time of a check.
Your score can be lowered by one mistake. Always pay your bills on time, make loan payments on time, and refrain from taking on more debt to avoid this.
The Wrap-Up
Starting to develop credit as soon as possible is the finest thing you can do to generate a desirable credit score and report that will serve you well throughout adulthood. You won’t encounter any difficulties while applying for credit products at any point in your life if you have a strong credit file and score. You will also save money if you are qualified for the best rates creditors can provide, which will increase your available funds for the future. You can never start planning too early for an extended period of financial stability.
