As an 18-year-old, you may be looking to establish credit so you can start building a positive credit history. But on the flip side, it may not be at the top of your to-do list.
It’s important to establish credit early in life for a number of reasons. A positive credit history can help you get an apartment, a car loan, a mortgage and even a job. It takes time to build a credit history, so it’s important to start as early as you can. Doing so before the age of 21 can come with a few roadblocks, but it isn’t impossible.
Here’s why it’s important to establish credit early and some tips on how to manage your first credit card.
Why it’s important to establish credit early on
It’s important to establish credit while you are young because it can help prepare you for many firsts, such as your first apartment, first car loan and even your first job. A positive credit history is about more than just being able to use a credit card to buy things. As a truly independent adult, you will need to be able to rely on your credit history for everything from getting a cellphone and utilities in your name to qualifying for the best car insurance rates.
Your credit history will play a big role in whether your applications are approved. It will also determine how high your interest rates will be and whether you are asked to pay additional security deposits. Landlords may check your credit when approving your apartment application, and it will be critical for buying your first home. Your credit history — but not your credit scores —may be considered by potential employers when you are looking for your first job.
Building good credit young can help you later in life
Establishing credit and learning to use it wisely when you are young can make your transition to adulthood much easier. You may be more worried about your SAT score than this three-digit-number, but it is fairly straightforward. When you start to work on establishing your creditworthiness while young, you’re setting your older self up for success.
Lenders view your creditworthiness as the likelihood that you will repay a debt without defaulting. They are asking themselves, is this person worthy of credit without it being a risk? When you open your first line of credit, such as a credit card, you’re actively working on building your creditworthiness.
Now, when it comes to calculating your credit score, scoring models like FICO consider payment history and amounts owed as the two most important factors in achieving a good credit score. If you can make consistent on-time payments and keep your credit-to-debt ratio low, you will be setting yourself up for success.
How old do you have to be to get a credit card?
This is where it can get a little tricky. In general, cardholders must be at least 18 to get a credit card. However, if you’re under the age of 21 and lack a credit history, most issuers will require you to show proof of a steady source of income.
Some issuers have minimum age requirements for becoming an authorized user. However, major issuers including Bank of America, Citi, Chase, Discover and others do not have a minimum age requirement for authorized users.
As an authorized user, you’ll get your own card, but the primary cardmember is responsible paying back whatever you spend. Being an authorized user can help you begin to build a positive credit history, assuming the credit card issuer reports authorized user activity to the credit bureaus and the cardmember is making on-time payments.
With a secured card, you’ll be able to use your card online and in-person the same way you would with an unsecured credit card, but it is backed by collateral. This means you must pay a deposit in order to secure a line of credit. Typically, your credit limit is equal to the amount of the initial deposit. Here are our picks for the best secured credit cards.
Tips for managing your first credit card
A credit card can be a convenient way to build credit, but your newfound journey with plastic shouldn’t be taken lightly. Irresponsible credit management will delay your goal of building good credit, defeating the purpose of starting while you’re young. Having a realistic idea of your intentions when it comes to credit is a great way to approach your finances. So, here are a few tips worth considering:
Set up a budget
The 50/30/20 method suggests spending 50 percent of your take-home pay on necessities like housing and groceries, 30 percent or less on items you want but don’t need and 20 percent or more on savings and paying off debt. Calculate how much you can afford to spend and track your purchases by reviewing your credit card statement regularly. This will help you stay within your budget and avoid credit card debt.
Set up automatic payments
To set up automatic payments for your credit card, you’ll need to log into your account online or through your issuer’s app. Once you’re logged in, look for the option to set up automatic payments and follow the instructions. You’ll need to provide your bank account information and the date you want your payment to be processed. Once you’ve set up automatic payments, your credit card bill will be paid on the same date each month. This helps take the stress out of remembering when to pay your bill each month.
Only charge what you can pay off in full
You should always treat your credit card like it’s cash. If you can’t afford to pay off your credit card in full, it may be time to take a break from swiping. Your credit utilization, or how much of your credit limit you use, is the second biggest contributor to your credit score. Maxing out your credit card can hurt your score and set the foundation for getting into credit card debt. Using less than 30 percent of your credit limit is generally better for your credit score, but always strive to pay your balances off in full.
Pay more than the minimum
If you only pay the minimum on your credit card bill each month, you’ll end up paying more in interest. Your balance will only decrease by a small amount each month, since a portion of your payment will be applied to accrued interest. To avoid paying interest, pay your balance in full each month. However, if you are in a bind and find yourself only able to pay the minimum, that’s OK. Paying the minimum is always better than not making a payment at all (which would damage your credit score).
Review your credit card statement each month
You should review your credit card statement each month to catch any errors or unauthorized charges. If you spot either of these, report them to your credit card issuer immediately. Most credit cards come with a zero liability guarantee, meaning you won’t be held responsible for fraudulent charges.
The bottom line
It can be incredibly frustrating getting a credit card at a young age because lenders see you as a risk when you don’t have an established credit history. It may seem counterintuitive and, honestly, it can be.
However, it isn’t impossible, and you can get a head start on your financial journey by becoming an authorized user or applying for a secured credit card. When the time is right, the good credit you’ve been working on since you were 18 will carry you to your own unsecured credit card.