Turning 18 is a major milestone in every person's life. You've now got the right to vote, to enlist in the military, and you're viewed as an adult in the eyes of the law.

This period also brings certain challenges. Being an adult means you can no longer rely on your parents or guardians to foot the bill. You need to gain greater financial freedom, earn your own income and monitor your financial obligations. Whether you're 18 or 64, many adults have difficulty when it comes to personal finance.

Although most people don't start to build credit until at least a few years after turning 18, it's still worth learning the basics. What is credit history and how can access to credit impact your life?

The more financial know-how you have earlier in life, the easier it'll be for you later down the line. These concepts aren't terribly difficult, though can sometimes take a while to incorporate into your everyday.

Once you understand the intricacies of credit building, personal finance, and credit scores, you'll be set up for success.

The first problem you'll encounter if you want to build credit at 18 is the lack of credit history to take out a loan. Talk about a chicken and egg situation, right?! This can automatically make it more difficult to sign up for personal loans, credit cards, student loans. In some cases, you'll need a co-signer for the loan (usually a family member).

However, this doesn't mean that it's impossible to get a student loan or car loan if you're 18; it just means you'll have a slightly tougher time than adults with a more established, good credit history. This is why it's important to learn how to build credit at 18 by following certain steps about credit reports, building credit, credit scores, etc.

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7 Steps & Tips to Building Credit at 18

Building credit takes time. It isn't something that can happen overnight and usually requires a certain amount of flexibility and versatility.

Nonetheless, it is something that every individual needs to know, especially at 18. This section of the article will go over the 7 steps you should take to achieve good credit habits and positive credit history.

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Learn how Credit Scores and Credit Reports Work

Credit agencies calculate a credit score based on specific information that's used to compile a credit report. Individuals that don't have any credit history are often referred to as having a "thin file" or "no file".

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Credit Score

Traditional credit scores in the US range from 350 to 850. This three-digit number is used by many lenders to determine how risky it would be for them to lend you money. Some credit agencies (there are three credit bureaus in the US - Transunion, Equifax, Experian) may use different scoring systems to determine this risk but overall - the higher the better.

When you're applying for credit later in life, a higher credit score comes with better loan terms and interest rates. And the difference in terms between a low credit score and a high credit score can be enormous, like the difference between a 5% interest rate and a 25% interest rate, so it's worth protecting your own credit score.

Your credit score is determined by a number of factors. Different credit agencies may use these factors in different ways to compile your credit score. Here are a few of the determinants that are used to create your personal credit score:

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• Payment History - Your payment history contributes to approximately 35% of the credit score. This is the most important determinant of your credit score.
• Amount of Debt Owned - The more debt you have, the greater the chance of nonpayment (or inability to pay). Lenders that will extend you terms will generally price your loan with higher rates and fees to accommodate for the higher risk. The amount of debt you have contributes to approximately 30% of the credit score. (Note: Debt owned and payment history make up the 'credit utilization ratio' which you'll want to keep down but more on this later.)
• Credit History Length - This metric takes the age of your credit accounts into consideration and contributes to 15% of the credit score. Without repayment history, even the best financial models are guesses. Understandably, when you're building credit at 18, the lack of credit history doesn't work in your favor.

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Credit Report

Now that we've reviewed some of the information that a credit agency will use to determine your credit score, we can focus on explaining credit reports.

Your credit report is sort of like you financial report card. It contains important info such as the list of credit accounts, payment history, and outstanding & current account balances that lenders use to determine how likely you are to repay any new extension of credit. Having a positive payment history improves your credit and vice versa.

Any payment that is more than 30 days late gets reported to one of the three major credit bureaus. To maintain a strong credit score, make sure you pay consistently and on-time.

One crucial characteristic of payment history is that all of this information can stay on the report for 7 years, so be careful with what you're doing. Thankfully, the negative impact of bad payment history lessens as time goes by.

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Take a Look at your Credit Score and Report

A great way to get started is to visit a free credit score website. Keep in mind that many websites won't show the full dissection of your credit report for reasons of confidentiality, but you can still get all the relevant information and familiarize yourself to these concepts of financial self-reporting.

In recent times, you can get these reports for free every week due to the Covid-19 pandemic. Alternatively, you can check with your credit card company or even your bank to get the more information from them.

While reviewing your credit report, make sure that all the information listed is accurate and correct. Some lenders do not report certain information to all three of the credit bureaus. If anything is incorrect or incomplete, report it to the bureau that has that info on your report.

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Open a bank account with a financial institution

A checking or savings account does not directly establish credit history, but lenders often ask for bank account information and history on credit applications. Showing an established banking history - not large amounts, just regular responsible use - will work in your favor when applying for credit.

Don't feel a need to open an account at the same bank of your parents or guardians. All banks aren't made the same. There are lots of banks out there with different offerings and you'll want to do a bit of research to ensure you find the right financial institution for you. For example, if you're concerned about climate change, Atmos Financial is a fee-free digital banking option with the most climate-positive bank accounts in the world. With leading rates, up to 5% cash back on sustainable businesses, and modern banking design, Atmos is a great option if you're starting to establish your own financial self.

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Get a Secured Credit Card

Many 18-year-olds start building credit history by opening classic unsecured credit cards. In this context, an unsecured credit card refers to a credit line without collateral. Another great option to start being financially responsible is to get a secured credit card.

These starter credit cards requires you to place a security deposit down as collateral. The collateral ensures the lender gets paid back one way or another, so you typically can get very low interest rates on these types of financial instruments. A crucial bit of information here is that the amount you choose to deposit becomes the credit limit.

Using secured credit cards early on grants you some leeway down the road. You can start to build credit now and maintain capacity for taking out additional loans if you need.

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Become an Authorized User

An authorized user is a person added to a credit card account by the primary cardholder. Anyone can be an authorized user (for example, a child, spouse partner or friend), as long as the users meet the card issuer's age requirements.

While an authorized user can make purchases with their card, the liability and responsibility for making payment lies solely with the primary cardholder. Here's the twist: As an authorized user, the credit card account is reflected on your credit report, helping you to build credit history and a track-record of good payments.

Things to consider as an authorized user:

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• If the primary accountholder has strong repayment history, this can be great for you, because all of these characteristics will be reflected on your credit report.
• If the primary accountholder has a weak history of repayment, this will not help your credit. The impact of negative information depends on how the credit bureau views that history. For example, a missed payment won't be included on an authorized user's Experian credit report, but high credit utilization or a maxed-out credit card could end up damaging the authorized user's credit.

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Always Make Timely Payments

You should keep your payment history healthy by making timely payments in all regards - loan installments, credit accounts, utility bills, and more. Remember that your payment history contributes to 35% of your credit score.

Failure to do so will cause your credit score to plummet and the negative effects can stay in your credit history for up to 7 years! Seven years is a very long time to recover and it's not easy to dig out of that credit hole!

Enlist in an auto-loan/auto-pay system that makes all the payments on time for you (if you have enough money on your account balance) so you don't forget to make those payments.

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Keep your Credit Card Balance Low

What many people don't know is that the credit utilization rate should be kept low, targeting 30% or lower.

What is your credit utilization rate? It is the amount of credit used compared to your credit limit. For example, if your credit limit is $1,000, an outstanding balance of $300 gives you you a credit utilization rate of 30%. Keeping your credit utilization down to 30% or below signals to lenders and creditors that you are using your limits responsibly, spending within your means, and managing your debt appropriately.

Many financial experts agree that you should aim for just a 10% credit utilization rate. This guarantees you'll be able to pay off your balance every month, without worrying about paying interest.

This is just how credit works. It's always a good idea to keep low credit limits so you don't accidentally go overboard with the loans.

Speaking of paying off your credit balances monthly, this is a great habit to get into! Try not to spend too much on credit so that you can't repay the balance off every month. This habit alone will help you build an excellent credit score.

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Do you need a Loan (Car Loan, Mortgage Loan, etc.)?

There are many choices to be made here. Depending on your needs, you may be looking for a small installment loan, a car loan, or a student loan. All of these are good choices to help build credit as long as you pay them off on time.

Keep in mind, you shouldn't take out any of those loans unless you absolutely need them. The best path to good financial health is limiting your access to credit. Taking out loans simply to build credit is a bad idea since none of the loans are actually oriented towards helping you achieve that.

A credit-builder loan could be a great tool. The credit-builder loan is specifically designed to help you build good credit. Credit builder loans don't require much credit history, but do require proof of income to make payments and repay the debt.

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Keep Checking your Credit Reports and Scores

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It's a great habit to get into to keep revisiting your credit score.

For starters, credit card companies will do a credit check every once in a while so if you don't keep track of your finances and loan statuses, you won't know whether or not there's something to fix.

Anything that negatively influences your credit score will cause further headaches and delays for various financial products. Again, remember to actively check your credit history; you can gain access to credit reports by finding financial services companies that either require payment for said reports or give you them for free.

Always look for irregularities in said reports and report them to the relevant bureaus.

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Additional Credit Building Tips

We've gone through some of the core steps each new adult needs to take to ensure proper financial health as soon as they turn 18. However, there are a couple of other activities you can do to improve your overall understanding of how finances work.

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• Plan before going to college - Some make the mistake of taking out larger loans than they need. This puts unnecessary stress on the financial aspect of their lives and can cause difficulty in the future. You can avoid making the same mistake by taking a look at how much you can afford (and how much you need). This is done by undertaking the FAFSA (Free Application of Federal Student Aid) which will tell you how much you need to pay for college.
• Try to improve your score quickly - Boosting your score doesn't have to take long and if the proper steps are taken, it can take as little as a few months to bring it up to snuff. Getting your credit score can, however, take up to 6 months when you first open a credit card account. During these six months, you'll be able to make that credit history shine to show the lenders that you're a financially responsible person.

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Final Words

As an adult, many new aspects of life open up in an instant and can be pretty stressful to handle. Many people find financial wellbeing confusing and difficult to attain.

It's important to start learning about the financial side of life and what you can do to make it easier now and down the road. New to personal finance, these steps are a necessity if you want to get a head start and guarantee yourself a healthy financial future.

Things like opening a starter credit card, paying your credit card bill on time, and being timely with every bill payment showcase your financial understanding and knowledge to all kinds of banks and lenders. Every one of us has had to take out a loan or two for various reasons and with this knowledge, you can prevent issues that plague young adults.

At the end of this article, we'll leave you with one final tip. Always be diligent and precise with what you do financially. Do not make rash decisions and do not take out loans that you don't need as they'll only potentially dig you into financial trouble.

Make the effort to learn because it will save you from a lot of headaches in the future. The sooner you start learning about these topics, the sooner you'll become financially independent and healthy.

Lastly, keep an eye out for the various terms that lenders require in order to give out loans - read the fine print and always be up to date with your very own credit history. Good luck!

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