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Financial literacy is a crucial part of growing up and being independent. Having a solid foundation of financial knowledge can give you a big step up in life, especially as it helps you understand how credit works sooner rather than later. Knowing this, many young adults—and their parents—begin to wonder when financial literacy should become a priority. And, more specifically, at what age can you start building credit?
The short answer is that 18 is the minimum age for financial products such as loans and credit cards. But anyone can potentially start building credit before 18 if they’re an authorized user on an account.
How to start building credit before you’re 18
You can’t get a card in your own name until you’re 18, but there are ways you can start building your credit even before that age. The trick is to become an authorized user on someone else’s card. Some card issuers allow parents to add minors as young as 13 as authorized users on their accounts.
When someone adds you as an authorized user, you share access to the credit card account and usually receive your own card to use. In a situation where you’re not old enough to have your own credit card, someone who has a credit card adds you to their account and essentially vouches for your activity. They allow you to use their card and accept legal responsibility for the payment of all transactions.
As an authorized user, you start to build a credit history from all the payments associated with the card. If the payments are made on time and in full, you’ll benefit from a positive credit payment history.
However, the same can be true for the reverse—if payments are late or missed, it can damage both the cardholder’s and the authorized user’s credit. As a result, you should only become an authorized user on the card of a person you know and trust to be financially savvy.
Of course, there’s also a considerable risk to the cardholder when adding an authorized user. They need to trust that you won’t use their card without their permission or overspend to the point they can’t pay their monthly bill off. Some cardholders will add an authorized user but won’t give them a physical card to reduce the risk of unsupervised transactions.
Lastly, note that some card issuers don’t report to the bureaus on the activity of minors who are authorized users. If you’re becoming an authorized user for the sole purpose of building your credit, check your card issuer’s policy on reporting on minors. Otherwise, all that effort won’t work to benefit your credit at all.
Whether you become an authorized user or not, you can proactively learn how credit cards and loans work so you can hit the ground running when you’re old enough to have your own credit.
How to build your credit at 18
If you’re prepared for the greater responsibility that comes with managing credit, there are more options once you turn 18. You can continue to be an authorized user and benefit from a parent’s credit history, but other options may appeal to you and help you feel more independent.
Apply for a secured credit card
Card issuers may not be willing to grant you an unsecured credit card as soon as you turn 18. One alternative is to opt for a secured credit card instead. A secured card is exactly what it sounds like—it’s secured with a deposit, so the lender doesn’t assume such a high risk of taking you on as a borrower. You give the lender a $500 or $1,000 deposit and in turn receive a credit card with that limit.
Secured cards are a great way to introduce someone to the concept of credit without the potential of getting into debt. The cards come with low minimums and won’t allow the user to exceed their deposit. However, before signing up for a secured card, make sure to read the fine print. You’ll also want to be aware of any annual fees, late fees and other charges that can impact use of the card.
You’ll want to confirm with the card issuer that they’ll report the card activity to the credit bureaus, as some lenders don’t do this with secured cards.
Ask someone to be your cosigner
Another way to get a credit card at the age of 18 is to apply for one with a cosigner. A cosigner is someone with good credit who legally takes on responsibility for the card as well. If you stop making payments, the lender can go to the cosigner for payment.
Having a cosigner can give you plenty of additional card options, especially if you’re under 21. You’d typically only be considered for credit cards with low minimums, high interest rates and few to no card benefits at such a young age. A cosigner can help you qualify for better cards with higher limits, more perks and a better interest rate.
Take out a student or car loan
Qualifying for a student loan or a car loan when you’re 18 can be relatively straightforward. Once you have these accounts, they can help you build up your credit.
Your credit score is made up of five factors: payment history, credit utilization ratio, credit history length, credit mix and new credit. Student and auto loans can impact three of these factors:
- You’ll build up a positive credit history if you make your loan payments on time and in full.
- Having these types of loans, in addition to a credit card—which is revolving credit—helps you increase your credit mix.
- You’ll be opening accounts at a young age, which will help your credit history length.
A word of caution here: don’t take out a student or auto loan simply to build credit. These are typically large loans that will take years to pay off, so they should only be taken out if you need them. Still, if you do need these loans, knowing how to be responsible with them can help you boost your credit quickly.
Take out a credit builder loan
A credit builder loan is a type of loan meant to help people build up their credit. Unlike with a traditional loan, you don’t receive the money up front. Instead, the lender puts the money into an account you can’t access. You pay monthly, fixed payments on the loan until you’ve reached the final sum. At that point, you receive the loan. This type of loan can help your credit because the lender will report your monthly payments to the credit bureaus.
Look into rent or utility reporting
The data collected by the credit bureaus usually doesn’t include many of the bills you pay, such as rent and utility payments. But the credit bureaus introduced alternative reporting as a way to help people with thin credit profiles. Alternative reporting allows you to report on rent, utility bills, phone payments and more.
Benefits of building credit early
There are many clear advantages to building credit early. Most notably, you can build up a positive payment history early on, which will help you achieve a strong credit score. Additionally, your credit age is tied to your first credit or loan account, so the sooner you open one, the better for your overall credit report.
Thinking about credit now will set you up for success when you make larger purchases later in life, like a mortgage or car. Additionally, good credit can even help you when you apply for a job or an apartment.
Lastly, time is critical when it comes to negative items on your credit report. A negative item is anything that detracts from your credit profile, such as late payments, missed payments, collection accounts or bankruptcies. Negative items can stay on your credit report for seven to 10 years. However, these items will have less of an impact on your overall report as each year goes by. If you were to make credit mistakes, it would be better if they happened early on so they wouldn’t affect you later in life.
Work to maintain good credit habits
Maintaining good credit is all about creating a routine and sticking to it. Everyone should follow good credit practices, such as making payments on time and in full, keeping credit utilization low and checking credit reports regularly.
If you’ve recently realized your credit isn’t where you’d like it to be, consider getting professional help. The credit repair consultants at Lexington Law Firm work to help individuals review, dispute and address their credit so it more accurately represents them.
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