When it comes to building credit, financial experience is king. That makes it difficult for the average 18-year-old to get a foot in the door, especially since the Credit Card Act of 2009 made qualifying for a credit card much harder if you’re under 21. But everyone with credit started exactly where you are right now, and there are things you can do to build credit without the benefit of a lengthy credit history.
Start by learning the basics: Your credit score uses your financial history to determine how financially trustworthy you are. And a good score can help you qualify for everything from a low-interest auto loan or credit card to your dream apartment.
To build credit from scratch, focus on four key factors:
- Payment history: On-time payments are always positive for your score and are considered the most important factor in calculating it.
- Credit utilization: How much of your total line of credit you use. A good goal to aim for is 30% or less. So if you have a $500 credit limit, try not to go over $150.
- Mix of accounts: It’s optimal to have several types of accounts, like credit cards, a mortgage and student loans.
- Credit history length: The longer your credit history, the more financially stable you appear. The average age of your lines of credit is also considered, so new lines of credit can lower that average.
Once you have credit, track your credit score every month and order a free annual credit report to make sure you’re on the road to great credit. Until then, here are a few proven tactics you can use to build credit at 18, or whenever you’re starting out.
Become an authorized user on a parent’s credit card
Your age doesn’t have a direct effect on your credit score, but it can make it more difficult to have a lengthy credit history to bolster your score. Still, there is a workaround: Becoming an authorized user on someone else’s credit card means you benefit from the age of the account. So the older the card, the longer your history and the better your score.
Just make sure that the credit card company reports to a credit bureau (Equifax, Experian, TransUnion); otherwise, it won’t affect your score.
This can be a good first step to building credit, as NerdWallet’s resident credit card expert, Sean McQuay, illustrates:
My sister, age 20, has a 791 credit score and 10 years of credit history. That's the power of adding teens as authorized users on parent CCs
— Sean McQuay (@ssmcquay) October 20, 2016
Get a secured credit card
If you don’t have someone willing to add you as an authorized user, a secured credit card may be the answer. Unlike most credit cards, secured cards require a deposit, which becomes your line of credit. Usually, that will be between $200 and $2,000. You’ll also need an income to qualify, but the bar is much lower for secured cards than regular credit cards. In general, the smaller your credit limit, the smaller your income can be. So for a card with a $300 limit, for example, your baby-sitting cash may suffice.
Even though you’re borrowing against your own money, your purchases will have an interest rate attached to them, so you’ll still need to make payments on time to avoid paying extra in interest. Establishing this payment history, though, will help you build credit, unlike with a debit card. Depending on the secured card issuer, you may need a checking or savings account to qualify.
Before applying, double-check that the product reports to at least one credit bureau. If not, it won’t help you build credit.
When your score reaches the mid-600s, you can apply for a regular, unsecured credit card. If you’re still under 21 at that time, though, you’ll also need to prove that you have a steady income from a full-time job. You could also get a part-time or work-study job and use a co-signer to qualify. Once approved, use your credit card wisely: The minimum payment amounts are designed to keep you in debt.
Take out a student loan
Student loans usually shouldn’t be taken out just to build credit, but they will help you in that regard: You’ll automatically have a FICO credit score about six months after you take out the loan.
Both private and federal loans count toward that score. But it’s generally best to max out federal loans before taking out private loans. That’s because federal loans have better borrower protections, like income-driven repayment and forgiveness programs. Plus, there aren’t any credit checks on most federal loans. To qualify, fill out the Free Application for Federal Student Aid, or FAFSA, for each year you’re in school. If you have to take out a private loan, compare your options to make sure you’re getting the best deal.
For private loans, you’ll need a credit check to qualify. Many lenders do a “hard pull,” which becomes part of your credit report and can lower your credit score temporarily. Usually, you’ll have a 30-day window — starting from your first student-loan-related inquiry into your credit — to rate-shop with no impact to your score, according to Barry Paperno, a credit expert and blogger at Speaking of Credit. Just make sure that the amount you request on your loan application is consistent from lender to lender. Otherwise, those inquiries could be logged as separate loans.