If you’re young, the concept of credit might be a complete mystery to you. It shouldn’t be.
“Your credit score affects your ability to get a loan, the interest rate you pay, your ability to get an apartment, and sometimes even your ability to land a job,” says Brian Walsh, a certified financial planner and senior manager of financial planning with SoFi. Despite its importance, however, financial literacy isn’t usually taught in school – including how credit affects many of the major financial decisions you’ll make in your life.
The numbers agree. A recent U.S. News survey found that 56% of respondents got their first credit card without parental guidance, either after graduating from high school or during college. Additionally, 16% of respondents said they didn’t know how credit cards worked when they opened their first one.
That’s a big problem, especially considering how closely credit cards are tied to overall credit health. So, at what age can you start building credit? You’re able to open a credit card as early as 18 years old, which, when used responsibly, can help you to start building a good credit score. With your parents’ help, you may be able to start building credit even earlier. Here’s what you need to know about how to start building credit at 18 or younger.
Why Start Building Credit Early?
Good credit might seem like something you don’t need to worry about until you’re out of college, in a career and about to get a mortgage or finance a car. The truth is that credit affects your life as soon as you become an adult.
“Some components of your credit score are based on how you are currently using credit, whereas others are based on how you used credit in the past,” Walsh says. “Assuming you use credit responsibly, building credit early can help your credit history.” He notes that your credit history is based on the average age of your accounts, so it can take some time to improve.
Your credit can come into play when you apply for a job, buy a cellphone or purchase auto insurance. If your credit history is limited or poor, you may be viewed as risky, which means you could be skipped over for job offers and pay more for cellphones and insurance. Plus, when you do want to borrow money for a home, a car or another reason, your credit will determine the interest rates you pay – or whether you’re approved at all.
In fact, your credit history makes up 15% of your credit score. Lenders want to see that you have a lot of experience managing credit. The longer your credit history, the better your score will be. “Establishing credit early allows you to demonstrate a long credit history compared to someone looking to establish credit later in life,” says Nathalie Noisette, author of “Converted: Uncover The Hidden Strategies You Need To Easily Achieve Massive Credit Score Success.”
Noisette adds that there’s another benefit to building credit early: more time to make up for your mistakes. “Credit mistakes do happen,” she says. For instance, you might miss a payment here or there, or even have an account go to collections. The good news is that most negative items drop off your credit profile in seven years or less. “If a mistake is made, the individual still has a chance to make things right by the time they are in their mid-20s,” Noisette says.
How to Start Building Credit at 18
So how can you establish your credit when you’re starting from scratch? Though some strategies are tougher than others, you have several options:
- Open a starter credit card. This can take the form of a secured card or a student card. “(Secured) cards are designed for people who have either no credit or are trying to improve their credit, since the card can help build a positive credit history,” Walsh says. With a secured card, you pay a deposit upfront, which serves as your line of credit. Then, you make purchases and pay your monthly bill as you would with a regular card. Over time, your positive payment history will help you build a good credit score, and eventually, you should be able to graduate to an unsecured card.
Student credit cards typically are unsecured cards, requiring no deposit. They also usually have lower credit limits than traditional credit cards and offer less generous rewards. When you graduate, the issuer may convert your student card to a standard credit card.
In any case, if you’re under 21, federal law says you can’t get a credit card unless you can show you’re able to repay your credit card balance – usually by a source of income – or you have a co-signer on the card.
- Take out a loan. Another option is to take out a loan and build positive credit as you pay it back. With limited or no credit history, you might find some loans just as difficult to qualify for as a credit card. However, car loans and personal loans may be easier to qualify for with limited credit history. You might also need to take out student loans for school. Federal loans, unlike private student loans, come with protections and benefits that can help if you struggle with payments. Plus, you don’t need to go through a credit check to qualify.
- Try a credit-builder loan. As its name implies, a credit-builder loan is designed specifically to help borrowers build their credit. A financial institution deposits the money you “borrow” into a savings account that you can’t access until you have repaid the loan. As you make regular monthly payments, you build credit. Once you’ve paid back the bank, you get the deposit and any interest it earned – plus the positive payment history.
- Automate your payments. Payment history has the biggest impact on your credit, at 35% of your score. Walsh suggests automating your payments, which means putting your minimum payment on autopay so you don’t risk making late payments. “This will prevent future damage to your score and gradually increase your rating as more payments are processed on time,” he says.
Can You Build Credit Before 18?
Even though you can’t open a credit card before age 18, it may be possible to get a head start on credit building. Consider enlisting your parents, who can help you build credit as early as middle school.
How to Start Building Credit at 16 or Younger
If your parents have good credit, you might be able to take advantage of it by becoming an authorized user on one of their credit cards. As an authorized user, you’ll have the account added to your credit history. And this option works even if you’re a minor. Most cards allow authorized users younger than 18; some have age minimums, while others don’t. For example, Discover requires that authorized users be at least 15 years old. Issuers such as Bank of America, Capital One and U.S. Bank don’t specify a minimum age.
Keep in mind, however, that being an authorized user means the primary user’s actions impact your credit – positively or negatively. “Assuming the primary user pays their bills on time and keeps their credit utilization low, this could be a great head start to building your credit,” Walsh says. “Conversely, if the primary user misses payments or has a high credit utilization, then this could negatively affect your own score.”
Noisette adds that a card doesn’t even need to be issued to the authorized user, “so you don’t have to worry about your child maxing out your card. It’s just the history of the card that’s added to their credit report.”
Establishing Credit Responsibly Is Key
There’s no getting around it: Building good credit is crucial to accomplishing your financial goals. But it can also be risky, especially if you’re borrowing money without much experience handling debt. To make sure your credit-building efforts are successful, be sure to manage your credit wisely.
Avoid taking on more debt than you can afford to pay back, especially high-interest debt. It can be helpful to choose one budget item, such as a utility bill or cellphone bill, to charge to your credit card each month, and then pay it off right away. That way, you can build credit without worrying about racking up a balance.