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How to Build Credit at 18

Sandra MacGregor

Dec 17, 2021 9 min read

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How teenagers can build credit
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    Teenagers heading into adulthood might have some important decisions on their mind, including what to do after high school, what car to buy, and when to move out of their parents’ home. Another crucial consideration that doesn’t always get the attention it deserves is how to build credit at 18.

    Your credit score can play a crucial role in your future financial security. Your credit can impact your chances of finding a job, getting an apartment, and even leasing your first car. So the sooner you start thinking about building credit, the better.

    Of course, it can be hard for a teenager to build credit history because they don’t usually have experience with credit cards or applying for credit products. Luckily, there are a number of options to build credit at 18.

    10 Tips to Building Credit at 18

    In this article, we’ve put together 10 tips that you (or your kids!) can take to start building credit at 18. Building credit history at an early age can help you in the long run when you’re looking to open a credit card, get a loan, or buy a home. Here are some steps you can start taking today.

    Understand the Fundamentals of Credit Scores and Credit Reports

    Before you can focus on things like building a credit history, it helps to ensure you understand the fundamentals of credit scores and credit reports.

    A credit score is a number from 300 to 900 that represents how good you are at managing money and paying back debts (like loans and credit cards). Credit scores generally fall within five categories, from “poor credit” all the way up to “excellent credit”. The higher your score the better. With a solid credit score, potential lenders will see you as creditworthy and you’ll qualify for bigger loans, premium credit cards, and more affordable interest rates. This could save you tens of thousands of dollars over your lifetime. 

    Credit files are overseen by credit bureaus. In Canada we have two credit bureaus: Equifax and TransUnion. These companies collect payment and debt information from all your credit accounts and then give you an overall credit score that’s calculated using specific algorithms. But don’t worry about the math; the key thing to understand about credit scores is that they are made up of five key factors, and each of these factors makes up a different percentage of your overall score.

    The five factors are:

    • Payment history (35%): The most important factor in calculating your credit score, payment history tracks whether or not you pay your credit accounts on time. It’s crucial to make on time payments because even one late or missed payment can decrease your score.

    • Credit utilization (30%): Credit utilization is how much of your available credit you’re using. The lower your credit utilization rate, the better.

    • Credit history (15%): This refers to how long you’ve had credit accounts like loans or credit cards. The longer your credit history, the better.

    • Credit mix (10%): Your credit mix is the different types of credit accounts that you have open. It’s good to have a manageable mix of credit accounts, like loans and credit cards.

    • Credit inquiries/credit checks (10%): You don’t want to have too many potential lenders doing credit checks.

    Credit reports are much more comprehensive than a simple score because they show in detail how you manage your financial products. Creating and administering credit files is another one of the services provided by credit bureaus. These highly detailed reports document all your credit accounts way back to your very first credit card or loan. They include information about things like how long you’ve had a loan or credit card, late or missed payments, your balances and much more. Potential lenders rely on credit reports to decide whether or not you can be trusted to handle a loan or credit card responsibly.

    Monitor Your Credit Score & Credit Report Regularly

    Even if you’ve just started building up credit, it’s vital to stay on top of your score and credit file. Mistakes happen and it can take just one erroneous report about a late payment on one of your credit accounts to cause a significant drop in your score. Making a habit of regularly monitoring your credit report is one of the top things you can do to establish a strong credit file. 

    Get a Secured Credit Card

    A secured credit card is a great option for someone in their teens because these kinds of cards tend to be much easier to apply for than a traditional credit card. Secured cards are different from unsecured credit cards. With a secured card, you must provide a cash deposit to guarantee that you’ll pay off the card. Whatever amount of deposit you give then becomes your credit limit. So, if you provide a deposit of $300, you can only charge $300 worth of purchases on the card. Your card activity, such as how good you are at making payments, gets reported to the credit bureaus and therefore helps develop your credit score. Unlike with a traditional unsecured card, the issuer doesn’t assume any risk, making secured cards much easier to get even if you don’t have much of a credit history. If you don’t pay off your balance, the issuer just uses your security deposit to pay off any outstanding charges. 

    Open a Student Credit Card

    There are also student credit cards available from banks and lenders that are specifically designed for teens and young adults. These credit cards typically have low-interest rates, making monthly repayments much more manageable to students on a tight budget. Opening a student credit card and using it to make small purchases (like a cup of coffee before class!) or pay regular bills (like internet!) can help young adults build up their credit history.

    Sign up for Borrowell's Credit Builder

    Credit Builder is a $240 secured installment loan with a 36-month term.

    All payments (including missed payments) are reported to Equifax and TransUnion. Positive payments reported to the credit bureaus help you build credit, which is an important factor in qualifying for lower interest rates and better offers on credit cards, mortgages, loans and more. At the end of 36 months, your total savings of $240 will be directly deposited into your bank account.

    Obtain a Student Loan

    If you’re planning on attending college or university, you might need to take out a student loan to pay for tuition or other expenses. Some financial institutions offer specialized loans designed for students. Because they are intended for students, these loans tend to be easier to get even if you don’t have a credit history. As long as you make on time payments, they can help establish a good score and credit history.  

    If you’re paying back a student loan, you should make sure that your payments are being recorded properly on your credit report. Inaccurate data on your credit report can damage your credit score.You should download your credit report and review it regularly. If you spot mistakes, you can dispute student loan errors with the credit bureaus. 

    Make your Bill Payments on Time

    Payment history is the most important factor influencing your credit score. It’s crucial to never miss or be late with a payment. Just forgetting even a single payment can have a significant negative affect on your score and can stay on your file for up to seven years.

    To stay on top of your bill payments, record all your recurring payments and due dates in a digital calendar, or use bill tracking software to get automatic updates on when your next bills are due. This will help you ensure that you never miss a bill payment.

    Set Up Recurring Payments

    The best way to ensure you never miss a payment is to set up automatic recurring payments for your regular bills, like internet or streaming services. Payment history counts for 35% of your overall credit score, so it’s smart to make on-time payments a priority.

    Have a Good Credit Mix

    Potential lenders like to see that you know how to manage different types of credit, therefore aim to have a healthy and manageable mix of credit accounts. Having a student loan and an active credit card is a straightforward way to establish a good credit mix

    Keep a Low Credit Utilization Ratio

    Credit utilization is the amount of credit you’re using out of the total amount of credit you have available. It’s generally recommended to aim for a utilization below 30%. Potential creditors view a low ratio positively because it shows you aren’t carrying too much debt and are responsible about credit use.

    Why Does an 18-year-old Need Good Credit?

    The age 18 may seem young to be caring about your credit report, but the sooner you start building credit the stronger your score will be. A high score is important because any potential lender, whether you’re applying for a car loan or credit card, will review your credit to determine whether you can handle money responsibly. 

    Good credit will give you more financial flexibility. You’ll have more credit options and your applications will likely be approved. You’ll also be offered the best rates, making borrowing money more affordable. Additionally, a good credit file could increase your chances of getting a great apartment rental, because landlords may check your credit score to see if you’re likely to pay rent on time. It can even be easier to land a good job, since some employers run credit checks on job applicants.

    How Long Does it Take to Build Good Credit at 18?

    Credit bureaus in Canada don’t release exact figures about how long it can take to build up a good credit file. If you’re starting from scratch, it can take on average about six months to get your first credit score since it takes time for a credit bureau to monitor your credit activity. In general, there are no shortcuts and it can take years to get a credit score up to an “excellent” rating. The best thing you can do is pay attention to the two largest factors that affect your score: your payment history and your credit utilization. Keep those two factors on track, manage your credit responsibly and be patient and your score should enjoy a slow but steady increase.  

    Final Thoughts

    The best thing you can do to establish an attractive credit score and report that will serve you well throughout adulthood is to start building credit as soon as possible. A good credit file and score will ensure you have no problem applying for credit products at each stage in your life, whether it’s an auto loan or securing a mortgage for your first home. Being eligible for the best rates creditors can offer will also save you money, meaning you’ll have more savings to put aside for the future. It’s never too early to start planning for a lifetime of financial security.

    Sandra MacGregor
    Sandra MacGregor
    Personal Finance Writer
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    Sandra MacGregor is a professional writer who specializes in topics such as finance, travel, health, and lifestyle. Her work has been featured in the Toronto Star, the Montreal Gazette, and the New York Times. She is a regular contributor to the Borrowell blog.

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