Building a solid financial foundation is a journey that begins with small steps, and one of those significant steps is building your credit. Traditionally, you can start building credit at 18, but what if you could find a way to provide your child with a head start on this financial path?
For parents seeking to equip their children with valuable financial skills from an early age, the good news is that you can lay the groundwork even before they reach adulthood. This guide explores the ins and outs of building credit, emphasizing the advantages of initiating this process as early as possible. So, whether you’re a young adult navigating the world of credit or a parent looking to set your child on a path to financial success, read on to learn all about credit and starting early.
If you’re looking for ways to build your credit, MoneyLion is here to help! MoneyLion offers a free and convenient way to find offers from our trusted partners to help you improve your credit — such as credit monitoring, credit report disputes, and getting credit by paying bills. A good credit score can lead to lower interest rates and increased borrowing power on loans and credit cards.
Understanding how credit works
Credit is like a financial tool that allows you to borrow money or buy things and pay for them later. It’s kind of like a trust system between you and a lender (like a bank or a credit card company).
Here’s how it works.
Borrowing money: When you use credit, you’re borrowing money. For example, when you get a credit card, the credit card company is lending you money to make purchases.
Promise to pay back: When you borrow money through credit, you promise to pay it back in the future. The funds typically come with interest that you pay the lender for letting you borrow their money.
Credit score: As you use credit, your financial behavior is tracked by credit bureaus. They keep a record of how well you repay your debts. This information is used to calculate your credit score, which is like a grade for how responsible you are with credit.
Credit limits: Credit often comes with a limit. For instance, if you have a credit card, it might have a limit of $1,000. You can’t borrow more than that amount until you pay some of it back.
Revolving credit: Credit cards are an example of revolving credit. You can borrow up to your credit limit, pay it off, and then borrow again. It can be a never-ending cycle as long as you make your payments on time.
Installment credit: Other types of credit, like car loans or mortgages, work differently. You borrow a set amount, and then you pay it back in fixed monthly installments until the loan is paid off.
Credit is a tool that lets you access money you don’t have right now, but it comes with the responsibility of paying it back, often with some extra cost (interest). Building good credit means using it wisely and paying back what you owe on time, which can open up opportunities for bigger purchases and lower interest rates in the future.
Why should you start building your credit early?
The age of your credit history matters, so the earlier you begin, typically the better. Here are some important reasons.
1. Easier access to loans and credit in the future
When you start building your credit history early, you’re creating a record that shows how well you handle money. Lenders use this record to decide if they can trust you with loans or credit cards. Starting early makes it easier to get loans and credit in the future. A history of good credit use can come in handy when you need to borrow money for big stuff like buying a house or starting a business.
2. Lower interest rates on mortgages, car loans, and other credit accounts
Having good credit not only can help you get approved for loans but it also can give you a nice bonus – lower interest rates. Lenders are typically more willing to offer lower interest rates to people with a strong credit history. This means you’ll likely pay less money in interest over the life of the loan. For example, when you’re buying a home or a car, those lower interest rates can save you a ton of cash in the long run. This financial perk makes managing your credit from an early age a smart move because it can lead to big lifetime savings.
3. Build a solid financial foundation for adulthood
Starting your credit journey early isn’t just about getting loans and better interest rates. It’s also about setting yourself up for a strong financial future. Learning how to handle credit responsibly when you’re a teenager or young adult can help you develop important money skills that will be super useful for the rest of your life.
You’ll get the hang of making a budget, paying bills on time, and understanding how your financial decisions can affect your life. These skills are like money superpowers, especially when you become an adult and face bigger financial challenges, like managing debt, saving for retirement, and reaching long-term money goals. By getting the hang of good credit habits early on, you’re laying a solid foundation for financial success down the road.
How to start building credit early
If you want to give your child a financial head start, the five steps below can help them establish credit and have a good credit score by the time they’re ready to rent their first apartment.
1. Become an authorized user
Each credit card company has a different minimum age for someone to become an authorized user. This is often the first step someone can take to establish credit.
Barclays and American Express allow teenage children as young as 13 to become authorized users. Citibank, Chase, Bank of America, and Wells Fargo don’t have a stated minimum age.
By becoming authorized users, teens start to learn responsibility and benefit from the credit history of the card’s owner. If your credit score is low, it’s worth building it up before adding your child as an authorized user.
Keep in mind that if you give the authorized user access to a credit card, you’ll be responsible for paying off any charges they make. For this reason, it’s important to teach good habits like spending less than you earn before giving the authorized user access to a card.
2. Apply for a secured credit card
With a secured credit card, you deposit funds first, and those are used against the card’s credit limit. It is a low-risk way to establish a credit history and build responsible spending habits. The higher the deposit, the higher the credit limit. You may be able to get a secured credit card with as little as $200 to $300 deposited. Many banks also allow users to get a secured credit card against a savings account or credit union account.
3. Consider a student credit card
A student credit card is designed to help college students establish credit. Some student credit cards offer rewards like cash back or student-centric benefits to give college students a bit more each month. For a student credit card, students will need to be at least 18 and have a Social Security number. Many will also need a co-signer, although some student credit cards allow people with low or no credit to qualify as long as they have adequate proof of income.
4. Look into credit-builder loans
Credit-builder loans can be a way to establish a credit history faster. With a credit-builder loan, the lender deposits the loan amount into a savings account or certificate of deposit (CD). You can only access the funds when you’ve repaid the full loan amount. It’s a no-risk way for lenders to help you build a credit history.
5. Explore safe 0% APR cash advances
Some credit cards or online banks offer short-term 0% annual percentage rate (APR) cash advances that can be used to build credit history or establish credit. Do your research before taking out a 0% APR cash advance, as hidden fees can add up. Usually, you can establish credit at 18 using a 0% APR cash advance.
Top credit-building tips
Once you’ve got a credit card, credit-building loan, or another way to build a credit history, it’s important to plan accordingly to avoid building bad credit. For that, you need to know what banks look for and plan to meet their criteria each month.
1. Make timely payments
On-time payments make up 35% of your credit score. Whether it’s your first credit card or a loan, 100% on-time payments will go a long way toward building a good credit history. If you can’t pay off the full amount, make sure you pay at least the minimum due before the payment due date. A single late payment can affect your credit score for seven years, so be sure to stay on top of it.
2. Understand how credit works
In addition to on-time payments, there are five factors that affect your credit score in varying percentages:
- 35% payment history
- 30% amount owed (debt)
- 15% length of credit history
- 10% number of new credit lines
- 10% credit mix (revolving, installment, and open credit)
For each of these, there are actions you can take to help or harm your credit score:
- For payment history, pay all accounts on time every month.
- For the amount owed, ideally, pay off all credit cards every month in full, or keep the debt below 30% of available credit.
- For the length of credit history, the longer the better. Consider becoming an authorized user on the account of a relative or friend with 20-plus years of credit history and a good credit score.
- For the number of new credit lines, don’t apply for many credit cards or loans at once. Consider only applying for one or two credit cards or loans every six months.
- For credit mix, a credit card and a credit-builder loan are two different types of credit that will represent a good credit mix. If you have student loans or an auto loan and a credit card, that will also usually be enough for a good credit mix.
Keep these tips in mind, and you’ll start building up your credit score reliably.
3. Avoid overspending
One of the most important things to remember as you’re establishing credit is that it is borrowed money. While it can seem virtual, it can have very real impacts on your financial future, from interest rates on a mortgage to the ability to get an auto loan.
If you’ve got a budget of $200 per month for credit card expenses, don’t spend more than $200. Borrowed money is never free, and you’ll end up paying a lot in interest if you don’t pay off the full amount.
4. Monitor your credit reports
While building credit, it’s important to monitor your credit report to make sure there isn’t any incorrect or missing information on it. You’re entitled to a free online credit report every year from the main credit bureaus: Experian, TransUnion, and Equifax. If you find missing or incorrect information, you can contact the credit bureaus or file a dispute.
5. Request a higher credit limit
If you have the income to charge more on a credit card, requesting a higher credit limit can improve your credit score by lowering credit utilization. After six months of paying bills on time, you can request a credit increase. If you establish credit at 18, you’ll be able to request a credit line increase after six months and may see an improved credit score. Here’s an example:
If you have a credit limit of $1,000 and spend $500 each month, your credit utilization is 50%. If you request a credit limit increase and are approved for a credit limit of $3,000 and still spend $500 a month, your credit utilization decreases to an optimal level of 16.6%.
Never Too Young to Learn Money Management Skills
Starting to build your credit can happen when you turn 18, but you don’t have to necessarily wait that long to get started.
Parents, knowing this stuff can help you teach your kids how to be good with money early on. It’s giving them a head start on a strong financial future.
And for young adults, now that you know how credit works and why it’s smart to start early, here’s the important rule: be careful when you borrow money. Use your credit wisely, pay your bills on time, and don’t spend more than you can afford. These are the keys to having a safe financial future. Your money journey is just beginning, and with the right knowledge and a promise to make good money choices, you’re on your way to achieving your goals and having a happy financial future.
FAQ
Do I need to have income to start building credit?
Having a source of income is typically necessary to start building credit, as it allows you to demonstrate your ability to repay debts.
Will building credit at a young age help me later in life?
Building credit at a young age can significantly benefit you later in life by making it easier to access loans, secure favorable interest rates, and establish a solid financial foundation.
How long does it take to build good credit?
The time it takes to build good credit varies depending on individual financial behaviors, but it often takes several months to a few years of responsible credit management to establish a positive credit history.
