Your credit score is just a three-digit number, but it can unlock a plethora of opportunities if you have a good score or foreclose opportunities if you have a poor score. These opportunities include loans with lower interest rates and credit cards with more generous rewards. It’s never too early to start thinking about your credit score because it takes time to build up a positive credit history. After all, your length of credit alone accounts for 15 percent of your score. But, when you’re 18, you face a few more hurdles to building your credit score because of your age.
Applying for a Credit Card
Getting a first credit card is a great way to start building your credit, as long as you pay your card on time each month. Most of the time, lenders can’t use your age against you in determining whether or not to issue you a card. However, because you are under 21-years-old, you must be able to show that you have the independent ability to make repayments on the card. For example, even a part-time job might be enough depending on your income.
If you don’t have your own income or assets necessary to show you can pay back your charges, you must have a guarantor on the account who is at least 21-years-old. The guarantor promises to pay back whatever you charge on the credit card if you don’t repay it yourself. A guarantor could be a parent, older sibling or friend as long as they’re willing to put their credit on the line for you.
Consider a Secured Credit Card
If you can’t get approved for a traditional credit card, a secured credit card could be a viable alternative. A secured credit card works similarly to a regular credit card except that you have to put down a deposit equal to your credit limit. You still charge expenses and make your monthly payment like you would with a regular credit card, and it still shows up on your credit report to help build your credit, but the lender has your deposit to fall back on in the event you don’t make payments. Plus, sometimes your credit card company will refund your deposit after a certain period of time if you’ve shown yourself to be a reliable borrower.
Using Credit Responsibly
No matter what type of credit you use, make sure you use it responsibly. Otherwise, you could hurt your credit more than you help it. For example, paying on time each month helps build a positive credit history, but if you miss payments, your credit score will suffer. Also, aim to keep your credit card balances to less than 30 percent of your available credit.
- Prepaid credit cards can be convenient for things such as online purchases but are not the same as secured credit cards. They don't help build a credit rating.
- You can get a free copy of your credit report once each year from AnnualCreditReport.com. Your credit report will show your credit history, including major credit transactions and the standing of your account or accounts. You can use this information to correct or dispute incorrect entries as well as to guard against identity theft. Read the FAQs on the website for more information.
- Apply for only one or two credit cards at a time. Applying for too many credit cards can lower your credit score because each card you accumulate counts against your total available credit.Creditors also are skeptical of anyone who suddenly starts applying for several cards all at once. They might suspect identity fraud, for example.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."