As a young adult you’ll want to prepare in advance for credit consumption such as mortgages and car loans in the future.
But no one tells you how old you should start to accumulate things like credit scores or shows you how to figure out growth and calculation rules of credit scores.
Why is it important to know all these things early at the age of 18?
This guide is a comprehensive resource for anyone considering getting a credit card at 18. It explains in detail all you need to know about having a credit card, building credit scores, and getting approved for loans.
Why You Should Have a Credit Card at 18
After turning 18, a number of additional credit-based financial opportunities become available. Obtaining a credit card is a simple way to start building a credit history and score. Additionally, using a credit card to make purchases like vehicle rentals and hotel reservations is occasionally necessary.
If You Want to Get an Auto Loan at 18, You Need at Least 2 Years of Credit Activity to Get Enough Credit Scores
Lenders typically require 2 years of credit activity and history so they can assess your creditworthiness before they grant you an auto loan.
This time frame is used in most lending decisions. So, if you’ve just gotten your credit card, don't anticipate a fantastic credit score immediately, while it takes less than a year to accumulate enough credit history to generate a score, it takes years of wise credit usage to achieve a good or exceptional credit score for auto loans with a better rate.
There isn't a set minimum credit score needed for auto loans but, your credit scores can have a big impact on whether you get approved for a loan and the terms of the loan.
According to Experian's third-quarter 2022 report, auto loans are given to applicants with credit scores of 661 or higher in about 66% of cases, although individuals with lower scores still have options.
If your credit score is low you can still apply for an auto loan. However, you may have higher lending rates and fewer offers. This means if your credit scores aren't where you want them to be, that doesn't necessarily imply you should give up. You can still get an auto loan but, you might have to pay higher interest rates.
It's generally a good idea to check your credit ratings before you start looking for an auto loan and understand how they may affect the terms you receive from auto lenders for a new or used car loan. This is also a chance to look for mistakes on your credit reports that could lower your credit ratings.
In the end, lenders look for signs that suggest you've handled debt responsibly in the past and are likely to repay this new obligation on schedule and in full.
Be prepared to explain any blemishes, such as a collection account or numerous late credit card payments, as they will stick out as red flags on your credit report. If your credit history contains these kinds of bad entries, it could be harder for you to qualify for loans with the best rates and conditions.
If you need to get a home loan at the age of 18, you need at least 2 years to accumulate credit scores
Two years of proper credit practices and credit history should be sufficient to help you qualify for a home loan if you are establishing your credit from scratch.
Just like getting an auto loan, home loans require about a 620 credit score or higher. According to data, obtaining a decent credit score is simpler when a person has no credit history than when they do.
Any information in your credit reports may be reviewed by mortgage firms and other lending organizations. Mortgage lenders examine the information from your credit report, including your payment history, account mix, and debt-to-income ratio.
The most crucial data that mortgage lenders consider is information from the previous 24 months. However, they may look at negative information from years ago, such as late payments, bankruptcies, foreclosures, etc that would automatically preclude you from receiving a mortgage loan.
How Much Credit Do You Need to Rent a House?
To rent a house you need a credit score of 600 or higher. Apart from your credit score, most landlords will demand proof that you can afford the house rent and can make your rent payments on time. Although it might not always be necessary, having good credit can help you get the apartment of your dreams.
The national average for Americans is currently reached or exceeded by anyone having a credit score of 670 or higher. It’s important to note that a good credit score for renting will be lower than a good score for home ownership.
Therefore, a credit score of 670 or higher for your tenant is quite good for the majority of rentals. Since tenants lack the credit history of making mortgage payments to raise their credit score, most landlords aim for a score between 600 and 650.
The Calculation Rule of Credit Score
A credit score is a numerical value that represents an individual's creditworthiness, which ranges from 300 to 850. The higher the credit score, the more appealing the borrower is to potential lenders.
Lenders use credit scores because it is based on an individual's credit history, which includes factors such as the number of open accounts, total amount of debt, and history of repayment.
It's worth noting that lenders may also consider non-conventional factors when assessing a borrower's creditworthiness, such as the initial deposit required for a smartphone, cable service, or utilities.
Furthermore, lenders regularly evaluate borrowers' credit histories when making decisions such as adjusting a credit card's interest rate or credit limit.
It's important to mention that although the average FICO score range is often used, each creditor may establish its own ranges for credit ratings.
- Excellent: 800–850
- Very Good: 740–799
- Good: 670–739
- Fair: 580–669
- Poor: 300–579
When calculating a credit score, the following five factors are considered:
- Payment history
- Total amount owed
- Length of credit history
- Types of credit
- New credit
To learn to calculate your credit score better, check the table below;
|Payment history||It counts for 35% of a credit score.||It indicates whether a person makes their payments on time or not.|
|Total amount owed||It counts for 30% of a credit score.||It examines the credit utilization rate—the portion of a person's available credit that is actually being utilized.|
|Length of credit history||It counts for 15% of a credit score.||Longer credit histories are viewed as less dangerous because there is more information available to determine payment history.|
|Types of credit||It counts for 10% of a credit score.||It reveals whether a person has a combination of revolving credit—like credit cards—and installment credit, like auto or mortgage loans.|
|New credit||It counts for 10% of a credit score.||It takes into account the number of recent credit queries a person has made, the number of new accounts they currently have, and the date that their most recent account was started.|
The Growth Rule of Credit Score
There are a lot of quick, easy things you can take to raise your credit score. You can begin improving your credit score in just a few hours, even if it can take a few months to see results. Some steps in growing your credit score include;
- Take a look at your credit records.
- Get a handle on paying your bills.
- Use no more than 30% of your credit line.
- Put a cap on new credit requests.
- Fill out a sparse credit history.
- Keep your previous accounts active and take care of past-due bills.
- Think about debt consolidation.
- Monitor your advancement with credit reporting.
Whether they are short-term or long-term, each of these steps can help you raise your credit score and establish a solid credit history. Here is a closer look at what each step in the process of establishing good credit entails and how long you can anticipate it taking.
1. Taking a look at your credit records: This will only take about 1 to 3 hours of your time. Checking your credit history can help you find out what needs to be improved or what is damaging your score.
A history of on-time payments, low credit card balances, a variety of credit card and loan accounts, older credit accounts, and few credit inquiries are all factors that raise your credit score. Major factors that hurt a credit score include missed or late payments, excessive credit card balances, collections, and judgments.
2. Get a handle on paying your bills: It takes about 1 to 2 hours of your time. As shown above, payment history has the biggest impact on your credit score.
For this reason, it's preferable that paid-off debts (like your previous school loans) remain on your record. It works to your advantage if you made on-time, responsible debt payments. So, making on-time payments is an easy approach to improving your credit score.
3. Use no more than 30% of your credit line: The time it takes to complete this step varies based on total debts and monthly payments.
Paying up your credit card balances in full each month is the simplest approach to keep your credit utilization under control.
A decent rule of thumb is to maintain your total outstanding balance at 30% or less of your overall credit limit if you can't always achieve so.
4. Put a cap on new credits request: The time it takes varies on how often you need to access credit. If you are trying to raise your credit score, avoid applying for new credit for a while.
5. Fill out a sparse credit history: It takes about 3 to 6 months to see results from this step. Insufficient credit history on your report prevents a credit score from being generated, which is the definition of having a thin credit file.
6. Keep your previous accounts active and take care of past-due bills: Your credit score's age-of-credit component examines how long you've had your credit accounts open.
Your average credit age affects how lenders view you, and the older it is, the better. Do not close any outdated credit accounts that aren't being used.
7. Think about debt consolidation: This stage takes two to three hours to complete. It can be advantageous for you to obtain a debt consolidation loan from a bank, credit union, or online lender and use it to pay off all of your outstanding bills if you have a number of them.
If you can acquire a loan with a reduced interest rate, you'll be able to pay off your debt more quickly because you'll only have one payment to worry about.
8. Monitor your advancement with credit reporting: It takes about 20 to 30 minutes to complete this step. Credit monitoring programs make it simple to track the evolution of your credit score.
These services, many of which are free, keep an eye out for modifications to your credit record, including a paid-off account or a newly opened account.
Which Credit Cards are Good for Beginners?
If you have no credit history but are in a rush and can't wait to get a normal credit card, options like getting a student or secured credit card are always available.
Building credit at a young age is very accessible thanks to student credit cards. Student cards often feature reduced credit standards, higher credit approval rates for thin credit files, limited incomes, and benefits that are tailored exclusively for students, though you might need to provide proof of independent income if you are under 21.
Here are some examples of credit cards perfect for beginners;
- Capital One Quicksilver Student Cash Rewards: Best for students with limited credit
- Capital One SavorOne Student Cash Rewards: Best for students looking to earn rewards
- OpenSky® Secured Visa® Credit Card: Best for those with no credit history
- Capital One Platinum Secured Credit Card: Best for those looking for an easy-to-use card
- Capital One Platinum: Best for those with fair credit
- Chase Freedom Flex℠: Best for cashback
You can pick out the one that goes best for you through the little description beside it.
A fantastic objective to have is raising your credit score, especially if you want to get one of the top rewarding credit cards or apply for a loan to buy a significant item like a new car or house, and to do this you have to start early.
When you start making changes to improve your score, it may take a few weeks or even months before you start noticing a difference.
To get some of those negative points off your credit report, you could even need the assistance of one of the top credit repair businesses. However, you will see improvements more quickly if you start working to repair your credit as soon as possible.
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