Establishing credit takes time, but starting early also teaches you valuable lifelong lessons such as managing debt and finances. Good credit can also allow you to access lower interest rates on car loans, credit cards, mortgages and more. Many landlords also check credit reports approving rental applications.

Usually, you have to be at least 18 years old and have an income to apply for a credit card or loan, two of the most popular ways that people start building credit. Below, we explain the basics of credit and how you can get your financial life as an adult started off right. 

Understanding credit

In the United States, building credit is important if you hope to apply for loans and credit cards as well as everyday things from apartment rentals and phone plans. But there’s often a catch—to successfully apply for a line of credit, you need to have a good credit history. 

Your credit score is a three-digit number that lenders use to evaluate how well you manage your finances. Because lenders assume risk when they give loans and credit cards to borrowers, they want to ensure that they’re only lending to people with a history of effectively managing their debts. So the more financially responsible you are, the less risky it is for creditors to lend you money. This is because borrowers with good credit histories are more likely to pay back their debts on time.

A credit history has five factors. Each one is assigned a percentage value to calculate the total credit score.  

  • Payment history. Your history of making payments accounts for 35 percent of your credit score. Paying your debts on time and at the right amounts will benefit your credit history. But having a history of late payments, missed payments or defaults on any of your accounts will negatively impact your creditworthiness.
  • Credit utilization ratio.The amount of credit you use compared to the amount of credit available to you is 30 percent of your credit score. It’s important to keep your balances low to keep your credit in good standing. 
  • Length of credit history. The length of time you have held credit accounts also affects your credit score and accounts for 15 percent of your total score. This dimension also includes recent activity on your accounts. Generally, the longer an account has been open and active, the better the credit score. However, if you have inactive accounts, your score can suffer. 
  • New lines of credit. Lenders want to ensure that you don’t open too many new lines of credit within a short period of time. This kind of activity is a red flag for creditors. It suggests that you are struggling financially and may be unable to repay your debts. New lines of credit account for 10 percent of your total credit score. 
  • Types of credit. Having a variety of credit types is also beneficial to your credit score because lenders view this as evidence that you know how to manage multiple forms of credit such as installment credit (car loans and student loans) and revolving credit (credit cards). The types of credit you carry account for 10 percent of your credit score. 

These five factors are combined to calculate your total credit score. A credit score is three-digit number that provides a snapshot of your credit history. Credit scores range from 300 to 850. A higher score means higher creditworthiness. 

Building credit at 18

Here are a few common ways to build good credit at the age of 18. 

Become an authorized user

At age 18, you may not yet qualify to apply for most credit cards, but you may be able to establish credit by becoming an authorized user on a credit card account of a family member or a trusted friend.

Many major credit card issuers report information related to authorized users to the three main credit bureaus—Equifax, Experian, and TransUnion. Your score will benefit from the age and credit card utilization of the primary account holder. For example, if the primary cardholder has held the credit card for five years, has maintained a low balance and has made payments on time, their sound financial management will positively impact your score. 

But not so fast: be cautious in choosing a primary cardholder. If the borrower has a poor history of financial management, this behavior will also negatively impact your score if he or she starts missing payments, for example. 

Open a secured credit card

A secured credit card provides people with a certain amount of available credit depending on the amount of the security deposit. For example, your credit line will be $500 if you put down a $500 deposit. These cards are an effective way to build credit for those who lack a U.S. credit history because secured credit card issuers typically report your information to the credit bureaus.

If you miss a payment, the credit card issuer will draw from your security deposit to pay the balance due. But remember that any missed payments will still negatively affect your credit. Make sure to still pay on time and keep your balance low so your credit will benefit. 

Here are some secured cards that you may want to consider:

Best option without a bank account: The OpenSky® Secured Visa® Credit Card

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What the card offers: The main benefit is that Petal reports your credit account activity to all three major credit bureaus, and the monthly reporting can help you establish and build credit. Beyond that, the card doesn’t offer any notable rewards or benefits. 

Potential cons to beware of: When you open the OpenSky® Secured Visa® Credit Card, you’ll need to send a security deposit of $200 to $3,000, which will be your card’s credit limit. You can get the security deposit back if you, or the issuer, close your account while it’s in good standing (i.e., you don’t owe any money). 

Best low APR card: Green Dot primor® Mastercard® Classic Secured Credit Card. 

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What the card offers: The Green Dot primor® Mastercard® Classic Secured Credit Card doesn’t have a minimum credit history or score requirement, although you’ll need a bank account to apply. 

Many secured cards have a high annual percentage rate (APR), which impacts how much interest accrues when you don’t pay your credit card bill in full. The Green Dot primor® Mastercard® Classic Secured Credit Card’s rate is relatively low compared to other secured cards, which could make it a good option if you might occasionally carry a balance. However, you should still try to plan ahead and pay your balance in full whenever possible. 

Potential cons to beware of: The Green Dot primor® Mastercard® Classic Secured Credit Card has a $39 annual fee and 3% foreign transaction fee. The security deposit starts at $200, although you can send up to $5,000 if you want a higher credit limit.

Apply for a student credit card

Students can often apply for a student credit card as long as they are actively enrolled in a program. While credit limits are generally low for student credit cards, they can still a great way to build credit. Some student credit card issuers even offer incentives if you maintain good grades. 

Best student card: Deserve® Edu

If you’re in the U.S. as a visiting student, you may be eligible for a student credit card. Deserve created the Deserve® Edu card with international students in mind, and it could be one of your top choices. 

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What the card offers: The Deserve® Edu doesn’t require an SSN, which can be helpful if you’re studying in the U.S. and don’t have a job or taxable scholarship that makes you eligible for an SSN. 

In addition to the basic Deserve® benefits, you can earn 1% cash back on all your purchases and get 12 months of Amazon Prime Student for free. 

Potential cons to beware of: As with the Deserve® Classic, your account and payments don’t get reported to Equifax. You also can’t use the card to take out cash advances or transfer balances to the card from other credit cards. 

Apply for a student loan 

Students who might need financial assistance to attend school can also apply for a student loan. In taking out a loan, you’re not only securing funding for your education, but you can also build your credit history in the process. 

Keep in mind, however, that student loan applications typically require a co-signer, someone with an established credit history in good-standing. A co-signer agrees to take accountability for paying back your debt if you default on the loan, so make sure that you manage any loans you take out well. 

Keep track of your credit

Try to get into the habit of regularly monitoring your score once you start building your credit. You are entitled to a free credit report from each of three main credit bureaus once a year. 

Monitoring your credit can help you keep track of areas that can positively impact on your score and spot ways you can improve. Check over your accounts regularly to make sure that everything is accurate and raise any errors with your records to the attention of the credit bureaus. 

The takeaway

Credit history is a key part of the U.S. financial system, but it can take a while to build a healthy credit score. Establishing good financial habits at a young age is a key step towards healthy financial habits.  For more resources on how to navigate your new life in the U.S., visit Nova Credit’s resource library where you can learn about everything from renting an apartment to finding the best credit cards for noncitizens.