In 2020, USA Today reported that Americans between the ages of 18 and 22 had an average credit score of 641. When you compare this with the 710 credit score of the 56-to-74 age bracket and the even higher 731 scored by the 75+ crowd, it’s clear that many young adults are having a hard time building their credit.
Between credit cards, student loans, and the labyrinth that is financial management, learning how to build credit at 18 isn’t easy. But learning how to manage your finances can give you an edge in life.
Want to learn more about building credit as a young person? You’ve come to the right place. Keep reading to find out how you can start establishing stellar credit ASAP.
Why Good Credit Matters
From fashion choices to bad grades in freshman year, there are all kinds of less-than-ideal situations that young adults can recover from. But does the same reasoning apply when it comes to credit? Here are key facts that every young person should know about credit:
1. Solid Credit Can Save You Money
Have you ever heard the phrase “It takes money to make money.”? In personal finance, you could rework that sentence to say “It takes good credit to receive credit on good terms.”.
Here’s what I mean:
Everyone has a friend who’s always broke or running behind on bills. During your college and young adult years, you might even be that friend in your circle.
All things being equal, are you more willing to lend money to the broke friend or the one that has a job and a solid history of paying people back?
Lenders are often dealing with the same dilemma. But unlike your friend group, they have no way of assessing your ability to pay them back. So they’ll look at your credit score to understand how you handle credit.
If you’re a low-risk borrower, you’ll likely receive loans at lower interest rates. And in a world where two percentage points can represent thousands of dollars spent, your credit score could be your ticket to receiving cheaper financing.
2. Credit Can Affect Your Career Opportunities
In 2018, 95% of employers conducted some type of background check. Depending on your industry and the positions you apply for in the future, your creditworthiness could have a profound impact on your career trajectory.
If you’re a Fortune 500 CFO or a VP at a major bank, for instance, a credit check will likely be par for the course. And even when you’re not directly the person in charge of the money, some companies may still want to make your offer conditional on passing a credit check and background check.
People can change their financial habits over time. But past credit debts and missed payments can linger in your credit score for years at a time.
When your credit score is on point, you don’t have to worry about conditional offers and employer credit checks — your ability to pass is a foregone conclusion.
3. Credit Can Affect Your Lifestyle Options
You might be reading this section and thinking, “How could credit affect my life beyond my career progression?”. And the answer to that question is, “You’d be surprised.”.
Here’s what it ultimately comes down to:
Regardless of your major and your choice of career, you’ve probably got a lifestyle standard that you’re working towards. Maybe you want a car that’s stylish, functional, and able to get you from point A to point B. Or perhaps you want to book flights without needing cash upfront.
These might seem like relatively little details, but your ability to access these things can affect your quality of life.
Think about it. If you have a choice between the crummy apartment in a rundown neighborhood and a nice place in a great area, you’ll take the second one every time, right? Depending on your housing market, your credit history could be the difference between landing your top pick every time and having to make do with a subpar car and a less-than-ideal apartment.
When you have strong credit, you don’t have to worry about whether you’ll be stuck in a dangerous neighborhood or rejected for that sporty convertible you’re purchasing — the approval process will be a mere formality.
The Two Benefits of Building Credit Early
We’ve talked about why credit matters in broad strokes. Now it’s time to discuss a couple of reasons why it’s a good idea to start establishing your credit as soon as possible.
1. Account Age Affects Credit
What do pickles, wine, and your credit have in common? They’re all items that get better with time.
Lots of people think that credit is something they’re better off establishing in the future. But creditors value account age so much that it’s one of the key factors that get weighted into your credit score;
You see, anyone can pay their bills on time once or twice. If they’re really dedicated, they can even make their payments six times in a row. But if your present and future paychecks depended on your ability to pick the right borrowers, would you rather put your money on the person who got a credit card last week or the one who’s been making payments for the past 10 years?
Here’s the bottom line:
The sooner you can start establishing your credit history, the better.
2. You’ll Master a Critical Component of Being Independent Adult
You’ve got a credit card bill and a utility bill due on the 13th, but you don’t get paid until the 15th. What do you do?
Your credit card takes two days to post payments but you need to make an important purchase right away. How will you handle this?
Whether you’re 18 or 50, adulting can be tricky at the best of times. And for many adults, personal finance is where things tend to get especially complicated.
Building savings. Working towards retirement. Using enough credit to establish a history while still being able to make payments.
These goals are all a necessary part of developing financial discipline. If you can build your credit early, you’ll be way ahead of the curve.
How to Build Credit at 18
Okay. I’ve talked about what credit means and why you should be focused on building it. But none of that explains how you can go from no credit to great credit.
So without further ado, here’s what you need to know as you learn to build credit.
1. Learn the Fundamentals
Pick a sport. Any sport. Whether you’re thinking of basketball, hockey, or any other sport, there’s one thing that all the pros have in common:
They aren’t just “okay” when it comes to fundamentals — they’re the best in the world.
For instance, if Steph Curry didn’t know how to dribble or shoot, would he be a superstar? If Wayne Gretzky skated with all the grace and skill of a baby giraffe on ice, would he have become one of the greatest hockey players to ever do it?
Believe it or not, credit works the same way.
At this stage, you’ll want to read up on how credit works. As such, you’ll learn about things like how to read a credit report, how to calculate interest, and how to tell when you’re getting too close to your credit limit.
If you’re like most people, brushing up on Credit and Financial Management 101 isn’t an ideal way to spend a weekend. But once you get the hang of the fundamentals, you’ll be establishing your credit score at warp speed.
2. Take Out Low-Risk Credit
When you’re starting with little to no credit, you’ve got one credit-related priority:
You need to show future lenders that you can handle credit. But of course, very few banks are going to let someone with no credit take out a mortgage or a massive line of credit. Luckily, however, there’s a way out from under this conundrum:
You can take out credit products that don’t represent a huge amount of risk to lenders.
There are credit-builder loans that you can use to get your payments reported to the credit bureaus. And there are secured credit cards that may be worth considering.
Regardless of the exact approach you use, the lesson is the same — try to establish your creditworthiness with small amounts.
3. Make Your Payments on Time
Account age may affect your credit score. And lenders will assess details like your credit mix or your credit utilization ratio. But your payment history is far and away the most important issue for creditors.
You don’t have to take my word for it. Payment history is the most heavily weighted factor when it comes to credit scores.
It doesn’t matter if you’ve got multiple credit cards and a personal loan or a single line of credit. If you can make your payments on time each month, your credit score will always have a fighting chance at landing you a 700+ score.
4. Don’t Go Nuts
Credit can open you up to a whole new world.
While before you had to save up money to buy things, you can purchase all the items you want to buy and then some with credit. And although this is super convenient if you’re looking to take advantage of a sale or get ahead of the crowd, a credit card can even be a lifesaver.
However, I always advise parents to tell their teens that credit spending has its limits. And furthermore, credit cards shouldn’t be used as a primary funding source.
As a young person who’s looking to build up your credit, how can you avoid digging yourself a financial hole early? You can create and stick to a budget.
And if you feel like you still don’t have as much extra spending money as you would like, consider getting another job or building up a side hustle.
Credit-Building Best Practices
Let’s say you’ve got the basics down. You’ve hammered out a budget, you’re well-versed in all things credit, and you’ve got your brand-new credit card. As it turns out, there are multiple ways that you can speed up your credit-building efforts:
1. Become an Authorized User
Do you have a parent or a grandparent with good credit? Well, I’ve got good news. You can benefit from the responsible payment habits and well-established history of your relative by getting signed to one of their credit accounts as an authorized user.
This way, you don’t have to make payments. You don’t have to carry around another card, and you don’t even have to spend a dime on the account.
When you’re an authorized user on an account in good standing, you can establish your credit on easy mode.
2. Watch Your Balance
In 2019, it was revealed that 21% of Americans didn’t know if they were carrying debt. And as if that number wasn’t shocking enough, another 30% didn’t know how much credit card interest they were paying every month.
This might not matter much if you’ve been covering your balance every month. But because credit interest can singlehandedly turn your $100 payment into a $150 one, you’ll want to create a system that allows you to keep track of exactly how much you owe. When you’ve got the numbers in front of you, it becomes a lot easier to create a realistic budget.
3. Check Your Credit Report
If you go by the image that financial professionals present, no one would blame you for thinking that financial companies don’t make mistakes. But in 2022, Equifax was outed for sending the wrong credit scores for millions of people.
In that case, the culprit was a tech-related snafu. But due to identity theft and constantly changing balances, it’s sometimes possible for credit reports to carry outdated or incorrect information.
Nine times out of ten, your credit report will likely be fine. If you are unlucky, however, an annual credit report check can help you get ahead of the problem before you apply for your first mortgage or loan.
4. Get Professional Financial Advice
Credit mix. Payment history. Debt-to-income ratios and credit score formulas.
When you’re still familiarizing yourself with credit and finances, it’s easy to find yourself falling prey to credit myths. That’s where I can come in.
You will get personalized advice from experienced financial experts. If you want credit coaching that will tell you exactly what to do and how to do it, you’ll want to check my services out.
Build Your Credit the Easy Way
Learning how to build credit at 18 isn’t for the faint of heart.
Discipline is a must. You have to be good with numbers. And perhaps, most importantly, you need to know what to do.
If you want to learn financial management at your own pace, I’ve got the perfect resource for young consumers. I’ve appeared on Huffington Post, The New York Times, Fox News, and Yahoo, to name places, and I can give you the knowledge you need to have perfect credit right out of the gate.
What are you waiting for? Sign up for my course!