It may be tempting to close out your first credit score. It has a low credit limit and you don’t use it anymore. Well, think again! Leave it open. It helps you with two things: Establishing a longer credit history and showing positive payment history. If you use less than 30% of your available credit, it can also help improve your credit utilization rate which helps build your credit and raise your credit score. So, keep your card open and buy a soda or gas or whatever on it every so often.
Tips for Responsible Credit Use at Age 18
Here are some tips on using credit responsibly at a young age:
- Make sure you understand the basics of credit: This is something that often isn’t taught at home or in schools but is so important for pouring the foundation for your financial future. Know what goes into making up your credit score, how it’s negatively and positively affected, and know how credit cards work and when you need to pay them back. The more you know, the better. Check out free credit and money management resources as early as possible.
- Have a steady source of income: Whether you’re in college and get a monthly allowance, have a part time job, a freelance gig, own your own business, or work full time, you need to maintain sources of steady income. Get creative and put your talents to work but make sure you make money. You will need it during your credit building journey.
- Make a budget and follow it: This is definitely hard in today’s often consumer driven and materialistic society but keep your goals in sight! By following a budget now, you’re more likely to be financially free later on. Save now so you can splurge later! And remember, that new designer item is not nearly as impressive as that high credit score. Additionally, that high credit score will put you in a position a designer item never could.
- Pay all your bills on time: Payment history is a huge factor that influences your credit score. Pay your bills on time every month! Life happens and sometimes we forget but set up auto-pay or put each due date in your calendar to ensure no payments are missed. You don’t want to risk having your credit score drop just because of one missed payment.
- Make more than the minimum payment: No one likes to waste money and that’s exactly what you’re doing when you only make your minimum payment. You’re throwing money away on interest charges. Pay your debts off in full each month if possible and if not, pay as much as you can to avoid interest charges.
- Keep credit utilization low: Just because you have $2,500 available credit does not mean you should use it all! Aim to keep your credit utilization ratio below 30% That means that ideally you shouldn’t use more than $750 per month of your $2,500 limit. This will help you prevent overspending but also help increase your credit score because credit utilization is one of the major factors that influence your actual credit score.
- Monitor your credit score and dispute errors: Use a credit monitoring service for a fee or keep an eye on your credit yourself if you’re going to be diligent about it. It’s always easier to put out fires, prevent fraud and identity theft, and dispute errors as soon as they happen rather than months down the line having to go back and fight to get them undone.
- Sign up for ExtraCredit: This site gives you one free credit score and a bunch of free helpful credit tips and insight including things like how different loans work and credit card guides to find the one that suits your needs. The site also has credit card payoff calculators.
- Take advantage of student credit cards: These are designed for students, may require you to be a full or part time student, and usually don’t have strict credit requirements because they know you’re building your credit. They may also offer rewards for on time payments and cash back benefits. This is a great tool to build your credit and then ‘graduate’ into a regular credit card.
- Consider a co-signer: A co-signer may be able to help you get that credit card, loan, or apartment that you want. They will need to be able to trust that you’re going to pay back whatever the debt is because they will be on the hook for it as well as you. You may need a co-signer at first and then once you make monthly payments and time goes by, you may be able to qualify without the co-signer.
Top Factors That Affect Your Credit Score
It's important to know the basics of credit at 18, including what a credit score is, what factors affect your score, and how credit is used by lenders and other organizations.
The main factors that affect your credit score include:
- Payment history: This is one of the most important factors affecting your credit score. In fact, it can account for as much as 35% of your credit score. Lenders want to see that you pay your bills and that you pay them on time. One missed or late payment can have a huge negative impact on your credit score so be mindful of paying on time every month even if all you can afford that one month is the minimum payment; it’s far better than not making a payment.
- Amounts owed: This is calculated by dividing the total amount of credit you’re using by your total credit limit and is known as your credit utilization ratio. You should aim to use less than 30% of your credit limit. For example, if your limit is $1,000, aim to use $300 or less each month. The amounts owed make up 30% of your credit score so are another important factor.
- Credit history length: If you’re young or just starting out on your credit building journey, you won’t have a long credit history. The length of your accounts makes up 15% of your score. Your newest account, oldest account, and average account length are all taken into consideration. Usually, the longer your credit history, the higher your credit score.
- Credit mix: Having a mix of credit accounts means that you have diversification such as credit cards, a personal loan, a mortgage loan, and an auto loan. Borrowers with excellent credit scores usually have a mix of creditors. The type and number of the accounts makes up about 10% of your credit score. You can work on building this up once you initially establish your credit history. For example, you can get a cell phone, a small personal loan, and a secured or prepaid credit card to start with. Then work your way up to home and auto loans.
- New credit: The number of hard inquiries on your credit report and the number of new accounts opened factor into your credit score. In fact, they make up 10% of your Fico score. Don’t apply for every credit card mailer or email you get. You don’t want too many new accounts or too many inquiries hitting your credit score. Think moderation here!
The Benefits of Building Credit at 18
Your credit score can determine if you will be approved for a loan and some employers often check your credit score before hiring you. At 18 it also matters because some student loans are credit based, so if you build your credit score, you may be able to get a loan to go to the college or university you always dreamed of attending.
Some benefits of building credit at 18 include:
- Lower interest rates: Good credit can lead to lower interest rates on loans,
- Better rental opportunities: You may be approved for that beautiful apartment with the swimming pool and tennis courts.
- Financial freedom: Having a good credit score, typically a Fico score between 670 and 739, can open the doors to so many possibilities.
- Saving money: Building credit early can save you thousands of dollars on lender fees and high interest rate loans.
- Open a business: Building credit early can be the difference between getting approved for a business loan to open up your dream bakery or sneaker store.
- Buy real estate: Build your credit so you get approved for that cute condo you always wanted to purchase.
- Higher loan limits: Qualify for loans with higher limits because you’re considered a qualified and low risk borrower that lenders want to work with because they feel like you’re going to repay the loan based on your positive past credit history.
If you start out with positive credit habits and knowledge, you’re less likely to make poor financial decisions later on. It’s much easier to start building your credit at 18 than it is at 38 when you have negative marks on your credit history and a plethora of financial and familial responsibilities to juggle.
Final Word
Now you know that your credit score is made up of different important factors including payment history and a mix of credit accounts. You understand how your credit score works, how important it is to monitor your credit report, and how to build credit at 18.
You’ve found out the benefits of building credit at a young age including setting yourself up for a successful financial future, getting the job you want, and being able to easily buy a house and a car. Now, it’s time to implement these strategies as you set out in the world. Remember, that it’s easier to build credit slowly and the right way in the beginning then to have to fix it later on.
