Credit Repair

So You’ve Turned 18. How Do You Start Building Credit?

Turning 18 means you’re a legal adult now, old enough to vote, open a checking account and, depending on your income and financial status, get your first credit card.

Congratulations! This is an exciting time for you. But before you take your first debit card for a swipe, or apply for a credit card, it’s worth taking the time to learn more about your personal finances and how to set yourself up for success. Building your credit now can serve you well for years to come, especially if you manage your finances responsibly and avoid mistakes, like missing payments or racking up more debt than you can afford.

“It’s a lifetime skill,” said Ben Raines, a financial educator at Ohio State University’s Student Wellness Center. If you start early and take ownership of your financial health as soon as possible, you’ll set yourself up for a much richer and less stressful life.

But how do you start building a credit history if you don’t have any experience with it? It may not be as hard as you think.

How to build credit from the ground up

Before you start trying to build credit, it’s a good idea to take a moment and learn about credit scores and credit reports, and how they may affect your financial future.

FICO scores are used in the majority of lending decisions, making them important for any consumer to understand, particularly if you’re just starting out. Your FICO score is calculated using five kinds of data found in your credit report: payment history, amounts owed, length of credit history, new credit and credit mix. The importance of the categories varies from person to person, and will change over time. You can learn more about how FICO scores are determined by visiting FICO’s consumer education center.

The other major credit score is VantageScore, which is calculated using much of the same criteria as FICO: how often you pay on time, how much of your credit limit you’ve used and how old your loans are. Other factors include new loans you’ve taken on and the types of loans you’ve acquired.

Once you’ve educated yourself about credit scoring, you may be ready to start using credit.

Student loans

For many people, student loans are among the first items that ever appear on their credit reports. As a result, they often weigh heavily on young people’s credit scores, particularly because most students have so few other loans on their reports, said Mark Kantrowitz, publisher and vice president of research at Miami-based

“It’s going to have a disproportionate impact on your credit history simply because it was very thin to begin with,” Kantrowitz said.

Student loans can even affect your credit while you are still in school or deferring your payments. Although you won’t be penalized for missing payments until after you’ve graduated and passed your grace period, the loans will still appear on your report. That’s a good thing, because it will affect the average length of your credit history. In general, the older your positive credit history, the better your credit score.

Depending on the loans you took out, you may be able to jumpstart your credit history early by paying down some of your student loans before you graduate. Some private student lenders will allow you to make small payments while you’re still in school. These payments will be reported monthly to the credit bureaus, which will positively impact your scores.

“You can actually have four years of payment history by the time you graduate,” Kantrowitz said.

Payment history is the single most important factor influencing traditional credit scores.

Apply for a credit card

“For college students who are trying to build credit from the ground up, one thing that helps is having a credit card,” said David Carlson, founder of Young Adult Money, in Minneapolis. Your credit limit will likely be low, preventing you from charging enough to get into trouble, and the on-time payments will help slowly build up your credit score.

You can pick a card that’s specifically designed for students, or you can sign up for a store card from your favorite retailer. Be careful, though, as store cards tend to have high APRs.

A secured card will also help build your credit history. In that case, you’ll need enough money to make a deposit — typically around $200 — in order to “secure” your line of credit. Depending on the card, the lender will usually offer a credit line of 50% to 100% of the deposit.

Just be aware that credit cards are tightly regulated and could be tough to access if you’re under 21. For example, the Credit CARD Act of 2009 requires those under 21 to have an independent income or cosigner in order to qualify for a credit card.

Become an authorized user on someone else’s credit card

If your parents are willing to let you piggyback on their credit cards — and you trust them to make on-time payments — that could also help you start building your credit history.

In that case, your parents would sign you up as an authorized user on one or more of their cards. You won’t be on the hook for payments, but your parent’s payment history will show up on your credit report. Just be sure to check with your parents’ card issuer to confirm that they’ll include you when reporting the payments.

Get a ‘credit builder’ loan

With a credit builder loan, you borrow a small amount — for example, between $300 and $1,000 — that you can access only when you’ve paid it off. These loans can be a great way to build credit from scratch because lenders that offer them, such as credit unions or alternative credit providers, are diligent about reporting your payments.

“It shows you’re making payments on time and you’re reliable,” Carlson said.

Tips for traveling the credit path

Once you’ve taken on some credit, it’s crucial to take care of it. Gabriel Serna, a professor of adult education at Michigan State University, said many students enter college with no idea how to responsibly handle credit and “can get themselves into a lot of trouble.”

“Missing payments can haunt your credit score for a long time,” Serna said. “Once your credit score takes a major hit, it takes months or years of payments to build it back up to where it was.”

For example, it generally takes up to seven years for a seriously late payment to drop off your credit report. More severe issues that can haunt you later in life, such as bankruptcy, can take as long as 10 years to disappear. You can also drag down your score if you max out your cards or try to take out too many loans at once.

Your goal should be to prove to lenders that you are responsible and self-disciplined. So be careful with how much credit you use and avoid overextending yourself.

You should also think twice about carrying a balance on your credit cards, because interest is expensive, particularly for cardholders with thin credit histories.

“If you carry a balance or miss payments, it’s going to hurt you more than help you,” Carlson said.

If you need extra support or advice, check whether your university offers a financial education center. Some universities, such as Ohio State, offer full-fledged financial counseling programs.

Credit is a journey

Deciding how best to build your credit and what tools to use depends on your individual circumstances and what you can qualify for and afford. But be patient. Building credit takes time. Even if you diligently pay your bills for months, it could be years before you qualify for the best loan rates.

“Look at this as a journey,” said Can Arkali, principal scientist for analytics and scores at FICO, in San Francisco. “There’s not a perfect path for anyone.”

That said, the basic ingredients for building your credit are universal.

“Pay all your bills on time and consistently, lower your debt as much as possible and then only apply for credit when needed,” Arkali said.

Focus on those key ingredients and you’ll be well on your way to building a solid credit profile.


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