How important is it to establish an 18-year-old's credit?
- JNT
Dear JNT,
It's very important to begin establishing credit as a young adult. A strong credit history (or lack thereof) has a far-reaching impact on a person's life beyond just getting a loan or a credit card.
For example, if you are moving out on your own for the first time, you may need to qualify for an apartment, utility service and your own cellphone service—applications that may require a credit check. Having a positive credit history can help you get an apartment, pay a lower security deposit, and pay lower connection fees or deposits for utilities.
If you're entering the workforce, you may need to finance a car so you'll have reliable transportation. Having established credit can help you get a lower interest rate or qualify for a lower down payment on a car loan.
And, although employers never get your credit scores, many companies do check your credit history as part of their hiring process, especially if you are applying for a job that involves managing money. Having a strong credit history can also help you land the job you want.
As you can see, beginning to establish credit as soon as possible can be a very important step to become independent. There is one important legal barrier to establishing credit when you turn 18. There is a federal law called the Credit Card Accountability, Responsibility and Disclosure (CARD) Act that prohibits anyone under the age of 21 from obtaining a credit card without a cosigner or being able to prove your ability to repay the debt.
The law creates a hurdle for young people establishing credit, but it's not insurmountable.
How Many Accounts Do I Need?
You don't need to have a lot of credit to establish a credit history, but it's good to have at least one account in your name, preferably a credit card. While it can be hard to qualify for a traditional credit card on your own right away, asking a friend or family member to cosign or add you as an authorized user can get you started. You can also consider opening a secured account.
Once you have an account in your name, if you have a cellphone, utilities or even a streaming service account, using Experian Boost®ø can help you get credit for making those payments on time by adding the payment histories to your Experian credit report.
If you are going to college and using student loans to pay for your tuition, those loans can also help you begin to establish credit, as long as your name is on the account. Keep in mind that if you have a cosigner, any missed payments will show on their credit history as well as yours.
Once you acquire an account or two in your name, remember that the most important factor in credit scoring is whether you make all your payments on time. The second most important factor in your scores is your credit utilization rate, which means keeping your credit card balances low is best for your scores. Ideally, you should pay any credit card bills off in full each month.
After a while (six months for a FICO® Score☉ ), you'll be able to get your credit score and start to monitor how your credit decisions factor in. Keep paying bills on time and maintaining low account balance and your scores can begin to reflect your responsible credit management.
Thanks for asking,
Jennifer White, Consumer Education Specialist