Branch Out And Get A Small Loan
To paint a bigger and better credit picture as an 18-year-old, build on your short credit score history and grab a small loan to flesh out your credit report and show creditors you can handle more debt.
The loan shouldn’t be large – think a few thousand dollars for a used car for college or work – but if you take the loan out and pay it back on time, you’re building an even stronger case as a consumer who’s a good credit risk.
Lenders and creditors do like credit applicants who offer up a good mix on their credit reports – it shows them you can handle multiple debts.
Open A Credit Card Or Be Added To A Credit Card As An Authorized User
To get on a lender’s radar, you’re going to need to have a credit report in your name.
That happens when you either get a credit card on your own or have your parents add you to their credit card as an authorized user. Either way, the goal is to spend sparingly using the card, pay your debts off before the payment due debt, and to start accumulating a track record of a responsible borrower.
You may need to start off with a credit card with a very low limit. The good news is that cards like that are available. Start with Journey Student Rewards from Capital One – Get Capital One Financial Corporation Report , Citi – Get Citigroup Inc. Report Double-Dash Card, or Bank of America – Get Bank of America Corporation Report Travel Rewards Credit Card for students – all of which cater to young financial consumers.
Journey Student Rewards From Capital One
Sign-up bonus: None
Rewards rates: 1% cash back on all purchases, with a 1.25% boost to cash back total with on-time monthly payments. Plus, earn $5 per month for 12 months on select streaming subscriptions when you pay on time.
The Journey Student Rewards card is targeted toward those with minimal credit history. While it may not earn the most valuable rewards on the market, it has many benefits that encourage responsible payment practices and can be a valuable tool for earning modest rewards while forming a good relationship with money and credit.
Plus, there are no foreign transaction fees in case your 18-year-old is traveling abroad.
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Why Start Building Credit Before Turning 18
There are 2 major reasons to start building credit as soon as possible though:
Signing Up For A Credit Card When Youre 18
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 changed a few things about how, who and when people could get credit cards. Most of the changes introduced were positive for consumers, including giving individuals enough time to pay their bills, no retroactive rate increases and making it easier to pay off debt.
Another change from the CARD Act? 18-year-olds can no longer sign up for a credit card without either proof of independent income or a co-signer . This effectively eliminated the whole university campus sign up for this card and get a free T-shirt using parents income situation that used to exist.
But for those of us with responsible teenagers, it does make things a little more complicated. Ive personally told my children that I own their credit until theyre 21, and its one of my parental duties to teach my children about responsible use of credit as well as set them up with a great credit score by the time theyre 21. Oh, and how to use their excellent credit to score tons of free travel, of course. Thus far, they are all happy with that arrangement.
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Manage Your Credit Wisely
Some might say that the largest factor in building a positive credit history is time. Simply opening a credit card wont improve your credit overnight, and taking out a loan you cant afford to pay can set you even further back. To build credit, you should learn to manage your available credit well. Keep in mind the factors from our first step that make up your credit score. Use a monthly payment calculator to determine your payoff schedule, make payments on time, keep balances low, and check up on your credit score and yearly to catch errors or fraud.
Is 7 Credit Cards Too Many
As with almost every question about credit reports and credit scores, the answer depends on your unique credit history and the scoring system your lender is using. “Too many” credit cards for someone else might not be too many for you. There is no specific number of credit cards considered right for all consumers.
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Stay Under 30 Percent
As mentioned, you need to use your credit card and pay it off on time to build a decent payment history and advance your credit score. However, you must be careful not to utilize 30 percent or more of your available credit.
Available credit is the credit limit on your card. For example, if your credit card has a credit limit of 1,000 dollars, you should never exceed your credit card spending over 299 dollars this is because utilizing 30 percent or more of your available credit harms your credit score.
Understand How Credit Is Built
The first step is having a solid grasp of what credit truly is. Your is a representation of how trustworthy you are with borrowed money. The three major credit bureaus receive payment information from loans, , and sometimes bills, and uses that data to calculate your score. Here are the major factors that go into calculating your FICO credit score:
Payment History: Your record of on-time payments.
Age of Credit and Type of Credit: How long any lines of credit have been open, and what kind of credit they are, like credit cards or loans.
How much of your available credit youre using as a portion of how much credit you have available.
Total Balances and Debt: The total amount that you owe across all lines of credit.
Recent Credit Inquiries: When a credit card company or loan servicer checks your credit history, this can be a hard inquiry. Fewer inquiries in a period of time demonstrate more responsible use of credit.
Available Credit: How much of your credit is unused.
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What Makes Up Your Credit Score
So, in order to know how to build credit at 18 you need to know what your credit account generally consists of. There are 5 categories that are used to calculate your FICO credit score:
Best For Low Fees: Petal 2 Visa Credit Card
Heres why: Its hard to get more low-cost than the Petal® 2 Visa® Credit Card. It charges no fees.
That means the Petal® 2 Visa® Credit Card doesnt charge an annual fee, a late payment fee or foreign transaction fees. Thats great, especially for a credit card that doesnt require a credit history or a security deposit.
The Petal® 2 Visa® Credit Card does offer rewards. Cardholders begin by receiving 1% cash back on all purchases, but can earn up to 1.5% cash back after making on-time payments.
The Petal® 2 Visa® Credit Card also comes with a money-management tool to help your teen track their spending.
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The Best Ways To Establish Credit
If the question What does your credit score start at? is at the top of your mind, here are some suggestions that can help you establish a strong FICO® Score and set you on the path to excellent credit:
- A secured credit card can be a great way to establish credit. Secured cards work just like regular credit cards and report your payment record to the three credit bureaus, but they do require a refundable security deposit. I used a secured credit card to help establish my own credit, and highly recommend this route.
- Alternatively, being added as an authorized user to a parent or guardians account can help you establish a FICO® Score. Just be sure the person who adds you uses their card responsibly — otherwise, it could have the opposite effect.
- Pay your card in full and before the due date every month. If you absolutely must carry a balance, be sure to make at least the minimum required payment to keep your account in good standing.
- Keep your credit card debt balances below 30% of your available credit. Experts generally agree that credit utilization above 30% can hurt your credit score.
- Apply for new credit sparingly. A flurry of new credit accounts and applications all at once can be a big negative for your score, especially if you have a limited credit history.
Financial Ties With Other People
If you close a joint account, request a notice of disassociation from the credit reference agency to stop your credit files from being linked.
If youre thinking of having a joint credit agreement with someone else, their credit rating might affect yours.
Thats because your credit file will be linked to the other persons and a lender might check their file as well as your own if you apply for credit.
For example, if they fail to make repayments on credit cards or other loans, it might make your credit rating worse.
Thats why its important to end financial links with ex-partners by closing any joint accounts you still have and contacting the credit reference agency to ask for a notice of disassociation to stop your credit files from being linked.
How To Get A Credit Card At 18 Years Old
Legally, you can get a , but its not as easy for young adults to get a credit card for the first time as it used to be. Thats because Congress passed a law requiring credit card issuers to ensure that young adults under age 21 have the income to pay a credit card balance. Otherwise, the young applicant has to get a co-signer.
Best For A Low Deposit: Capital One Platinum Secured Credit Card
Heres why: With the Capital One Platinum Secured Credit Card, your teen can get an initial credit limit of $200 with a security deposit as low as $49.
If your teen doesnt qualify for the $49 security deposit,they could be required to deposit $99 or the full $200 instead. Teens who wouldlike a higher credit line can deposit more.
The Capital One Platinum Secured Credit Card is great for teens who are trying to build their credit. Credit activity will be reported to all three major credit bureaus. And your teen may be considered for a higher credit limit in as little as six months.
One of the only downsides to this card is that it doesnt offer any ongoing rewards. But if your teen is looking for a secured card that has reasonable deposit requirements and a $0 annual fee, the Capital One Platinum Secured Credit Card is hard to beat.
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Why Is It Important To Start Building Your Credit As An 18 To 21
Establishing good credit when you are young can help you for the rest of your life. A solid credit history can be used to finance a car, get a mortgage, or take out a personal loan. Anytime you need to borrow money from a bank or financial institution they are going to take your credit into account.
Having a long and strong credit history can result in you getting a larger loan at a lower interest rate.
However, getting a credit card or line of credit when you are young and then abusing this credit not paying your credit card on time or in full, missing payments, wracking up multiple credit cards, or having your account sent to collections can create long-term financial problems. These missteps will stay visible in your credit history for seven years.
The good news if you make a mistake when you are 18 or 19 years old, that blip can be removed from your credit history by age 25 or 26. However, if you learn how to use credit responsibly when youre young, you can build a strong credit score.
Get A Secured Credit Card Or No
If being added as an authorized user is not an option for you, a secured credit card may be the answer. Secured cards require a deposit usually between $200 and $2,000 which becomes your line of credit. You can also explore alternative credit cards that do not require a security deposit.
Youll need an income to qualify, but the bar is lower for secured cards than traditional credit cards. Depending on the secured card issuer, you may also need a checking or savings account to qualify. Before applying, double-check that the product reports to at least one credit bureau.
You can use the secured card like a regular credit card. Ideally, pay off your full balance on time each month to avoid paying extra in interest and to establish strong credit as quickly as possible.
When your score has grown, you can apply for a traditional, unsecured credit card. If youre still under 21 at that time, though, youll also need to prove that you have steady income from a full-time job.
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Take Out A Credit Builder Loan
A credit builder loan, available from a bank or credit union, allows you to borrow money that sits in a savings account, which you will have access to at the end of your loan term. You will need to be able to show an income as proof that you can afford the payments, so consider choosing a small loan. As you make your payments on time toward your loan, the bank will report your activity to the credit bureaus. Not only will you end up with better credit in the long run, youll also end up with nice savings and who couldnt use that?
Building credit with a credit building loan
|Good FICO Score|
The Three Most Common Mistakes
Not using a credit card wisely. Controlling when you use a credit card and when you pay cash are the keys to good money management.
Being disorganized about paying your bills. Frequently or regularly paying your bills late will quickly damage your credit score. Setting up automatic payments from your checking account for your cell phone bill and other monthly bills can make paying on time easier.
Paying only the minimum payment on your credit cards. You do NOT have to carry a balance on a credit card to build a credit history. Paying the full balance on time will build a good history. Unexpected expenses do happen, and you may have to carry a small balance from time to time. But don’t fall into the trap of paying only the minimum payment for an extended time. The longer you take to pay off your debt, the more it will cost you. Check out I Paid How Much?
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Question: How Can My Students/children Check Their Credit Report
Parents will soon be able to both check and freeze credit files under their childrens’ names .
Starting in September, the Economic Growth, Regulatory Relief, and Consumer Protection Act will grant parents safeguards when it comes to their childrens credit. At no cost, parents will be able to check on and freeze credit files bearing their childs name by using the three major credit reporting bureaus Equifax, Experian and TransUnion.
The recent data breach at Anthem exposed sensitive information about millions of minors leaving them vulnerable to identity theft. This raises the question that your students might ask How can I check my credit report?
The theft of minors identities was already quite prevalent even before the Anthem data breach. Why? Most parents have not, as a matter of habit, reviewed their minor childrens credit reports since they assume such a report doesnt exist. One positive outcome of this Anthem breach is the increased awareness that they probably want to take a closer look.
So, when should you check your minors credit report? From FTC:
Checking to see if your child has a credit history, and then thoroughly reviewing it when they turn 16, can help you spot signs of identity theft. If you find false or inaccurate information, youll have time to correct it before your child applies for a job, a loan for college or a car, or tries to get a credit card or a place to live.
How can I check a minors credit report?