Managing debt can be a daunting task, but with the right strategies, you can make it easier to pay off and keep your finances in check.
Whether you’re trying to pay off credit card debt, student loans, or other types of debt, there are several strategies you can use to make the process easier.
Benefits of Effective Debt Management
Managing debt effectively is important for several reasons. First, carrying high levels of debt can be a financial burden and may prevent you from achieving their financial goals.
It can also have a negative impact on credit scores. This can make it more difficult and expensive to borrow money in the future.
Finally, failing to manage debt effectively can lead to financial distress and potentially even bankruptcy. By taking steps to pay off debt and reduce the amount of debt that is owed, you can improve their financial stability and well-being.
What is debt management?
Debt management is the practice of organizing and paying off debts through financial planning and budgeting. The goal is to lower and eventually eliminate debt. You can create your own debt management plan or hire a credit counselor to make one for you.
The advantage of doing it yourself is that it’s free, but it takes time and effort. Credit counseling can take stress off your shoulders, but is an added expense. There are many methods for debt management that you can implement on your own.
Assessing Your Debt
Gathering Debt Information
To effectively manage your debt, you first need to identify all debts and gather relevant information about each one. This includes the creditor, balance, and interest rate for each debt.
If you don’t already have a list of all your debts, you can review most of them on your credit reports. Regularly reviewing your credit report is an important financial habit to get into. You can request a free credit report from each of the three consumer credit bureaus at least once per year.
It can be helpful to create a spreadsheet or use a budgeting tool to keep track of all your debts, including the creditor, balance, and interest rate for each one.
Calculating Total Debt
Once all debts have been listed, it is helpful to calculate the total amount of unsecured debt that is owed. This can give you a better understanding of your overall financial situation and the work that needs to be done to pay off your debts.
Identifying High-Interest Debts
After calculating total debt, you should identify which debts have the highest interest rates. These debts may be a higher priority to pay off, as the interest will continue to accrue and potentially increase the total amount owed.
By focusing on paying off high-interest debts first, you can save money in the long run and make progress in paying off their debts more quickly.
Develop a Plan to Pay Off Debt
Developing a plan to pay off debt is crucial for financial stability and well-being. By identifying a strategy for paying off debts and sticking to it, you can make progress in reducing their debt and improving their financial situation.
Reduce Interest Rates
You may be able to reduce the interest rates on your debts by negotiating with creditors or transferring balances to a credit card with a lower interest rate. It is worth considering these options as they can save money on interest and make it easier to pay off debts.
Create a Budget
Creating a budget can help you identify areas where you can cut expenses and redirect those funds towards paying off debt. This may involve reducing discretionary spending, such as dining out or entertainment. You should also find ways to reduce fixed expenses, such as by shopping around for the best rates on utilities or insurance.
Humans are creatures of habit, and even when we’re in debt, the last thing we want to do is change our lifestyle. But any good debt management plan has to at least consider where your expenses could potentially be reduced. The more you can cut back on other expenses, the quicker you can get yourself out of debt.
It doesn’t have to be a long term change. Even reducing expenses for a few months can help.
Here are some examples of expenses you may be able to reduce:
Minimize entertainment subscriptions, or see if you can save by switching plans.
Minimize dining out and take your lunch to work.
Cancel your gym membership and work out at home.
Knowing your own finances in detail will help you find ways to reduce your expenses. Even if you work with a credit counseling organization, nobody is better placed to figure out how to reduce your costs than you are.
Consolidate Your Debts
One option for paying off debt is to consolidate multiple debts into one loan with a lower interest rate. This can make it easier to manage multiple debts and potentially save money on interest.
Debt consolidation options include taking out a personal loan or using a home equity loan or line of credit. Another option is transferring balances to a credit card with a lower interest rate.
Be sure to carefully review the terms and fees associated with consolidation options and ensure that they are a suitable fit for your financial situation.
Set Goals and Track Progress
To stay on track with paying off debt, it can be helpful to set specific goals and track progress towards achieving them. This may involve setting a target for the amount of debt to pay off each month or quarter.
It could also involve setting a goal for the total amount of debt to pay off by a certain date. Tracking progress can help you stay motivated and see the progress that they are making in reducing their debt.
More Tips on Managing Your Debt
Here are some additional tips for managing your debt that can help you effectively pay off what you owe and improve your financial situation:
Pay More Than the Minimum Payment
Making more than the minimum credit card payment can help you pay off your debts more quickly and save money on interest. Credit card companies typically set a minimum payment that is calculated as a percentage of the balance owed.
Making the minimum payment may be sufficient to avoid late fees and negative marks on your credit history. However, it may not make a significant dent in the overall balance. By paying more than the minimum each month, you can reduce the total amount of interest that you pay over time and make progress in paying off your debts.
Avoid Taking on New Debt
While you’re working on paying off your existing debt, try to avoid taking on new debt. This will make it easier to focus on paying off what you already owe.
Consider Setting up Automatic Payments
There are several benefits to setting up automatic payments for your bills:
Convenience: Automatic payments take the hassle out of remembering to pay your bills on time. You can set them up once and forget about it, knowing that your bills will be paid automatically each month.
Avoid late fees: If you forget to pay a bill, you may be charged a late fee. By setting up automatic payments, you can avoid these fees and save money.
Improve credit score: Paying your bills on time is a key factor in determining your credit score. By setting up automatic payments, you can ensure that your bills are paid on time and improve your credit score.
Simplify budgeting: When you know exactly when your bills will be paid each month, it can be easier to budget and manage your money.
Contact a Reputable Credit Counseling Agency
If your debt has gotten out of control, contact the National Foundation for Credit Counseling (NFCC) for detailed, personalized financial counseling and education. They can help you explore different ways to pay down debt.
A credit counselor can provide advice and assistance with developing a personalized plan for paying off debt and improving financial health. Credit counselors can also help you negotiate with creditors and create a debt management plan.
Seeking professional help can be especially beneficial if you are experiencing financial distress or are at risk of falling behind on monthly payments.
Bottom Line
In modern America, completely avoiding debt is difficult and potentially harmful. However, incurring debt without managing it effectively can be even worse. Follow the tips above, and you’re sure to get a solid handle on debt and use it skillfully.
Frequently Asked Questions
Should I pay off my debt with the highest interest rate first?
It can be a good idea to pay off your debts with the highest interest rates first, as these debts will cost you more in the long run. This is known as the “debt avalanche” method. Alternatively, you can also consider the “debt snowball” method, where you focus on paying off your smallest debts first to build momentum.
See also: Debt Snowball vs. Debt Avalanche
How can I create a budget to help me pay off my debt?
To create a budget, start by listing all of your income sources and all of your expenses, including your debt payments. Then, try to find ways to cut back on your expenses and redirect that money towards paying off your debt. You can also consider increasing your income by taking on a part-time job or negotiating for a raise at work.
What is debt consolidation?
Debt consolidation is the process of rolling multiple debts into a single new loan product with one monthly payment. This brings your payment schedule into a more manageable place.
Ideally, consolidated loans will come with lower interest rates and more manageable payment terms. Personal loans and 0% interest balance-transfer credit cards are among some of the most common debt consolidation options.
What is debt settlement?
Debt settlement is the process of negotiating with a creditor to reduce the level of your outstanding balance. This is one of the last resorts for those who have trouble paying their debts in full.
The process involves working with a debt settlement company to negotiate with creditors on your behalf. Generally speaking, creditors will only entertain debt settlement for debt that isn’t current.
It’s important to note that debt settlement requires you to stop making payments, which will harm your credit score. Debt settlement companies will also take their cut on top of any fees charged for successfully negotiating.
If you choose to take this route, make sure you find a reputable debt relief company to work with.
How can I rebuild my credit after paying off my debt?
After paying off your debt, you can rebuild your credit by making all of your payments on time. You should also try to keep your credit utilization low and diversify your credit mix. Other options include applying for a secured credit card or becoming an authorized user on someone else’s credit card to help establish a positive credit history.
If you’re an 18-year-old with no credit history, you can get a loan, but your choices may be more limited. You may have to tap into alternative options and sources, such as loans with a cosigner.
That’s because lenders like to lend to people with a history of borrowing and on-time payments. Oftentimes, young people just starting out have no credit history. This means they have no credit accounts in their name or haven’t used credit for a long period of time and the information has been removed from their credit history. Without credit, it can be difficult to access loans or credit cards, rent an apartment or buy a house, and obtain certain subscriptions.
Let’s take a closer look at loans for 18-year-olds.
Benefits of Loans for 18-Year-Olds
Two important benefits of getting a loan as an 18-year-old include gaining access to funds and building up credit history.
Access to Funds
The obvious benefit of getting loans as a young person is that you will have access to the money you need. Depending on the type of loan you get, you may be able to use the funds for a variety of purposes, including:
• Education
• Purchasing big-ticket items, such as a car
• Personal expenses, such as medical or wedding expenses
Build Up Your Credit History
Loans allow you to start building up your credit history, which can help you meet goals such as:
• Getting a cellphone
• Accessing utilities in your name
• Qualifying for a credit card
• Getting good rates on insurance, a mortgage, or auto loan
Plus, establishing a strong record of borrowing and repayment can position you well for future borrowing.
💡 Quick Tip: Need help covering the cost of a wedding, honeymoon, or new baby? A SoFi personal loan can help you fund major life events — without the high interest rates of credit cards.
Cons of Loans for 18-Year-Olds
While there are benefits to getting a loan when you’re 18, there are downsides to consider as well. Let’s take a closer look at a few.
Limited Loan Amounts
You may not be able to borrow a large loan amount when you’re young and just starting out. For example, if you want to purchase a $500,000 home as an 18-year-old and have no credit history, you’ll likely have difficulty qualifying for this type of loan.
Potentially High Rates
It’s possible to get a loan with no credit as a young person, but lenders may charge a higher interest rate than if you had an established credit history.
Why is that the case? Lenders try to assess your risk level when you apply for anything from a personal loan to a credit card. If they can’t see evidence that you have successfully made loan payments, they may not grant you a loan or they may compensate for that risk by charging you a higher interest rate.
Some lenders consider other aspects of your profile beyond credit history, including whether you can comfortably afford your payments.
Risk of Getting Into Debt
According to a consumer debt study conducted by Experian, Generation Z (those aged 18-26) had a non-mortgage debt average of $15,105 in 2023. This includes credit cards, auto debt, personal loans, or student loans.
While carrying any level of debt can be stressful, there are also financial implications to consider. For starters, if you don’t pay off your balance in a timely way, interest can start to build. Credit cards tend to carry higher interest rates than home or auto loans. This means wiping out credit card debt could take a long time if you only pay the minimum amount.
Then there are potential penalties to be mindful of, such as late fees. You may also face collection costs if you don’t pay your bills, which will remain on your credit report and potentially impact your credit score for years.
Recommended: Why Do People Choose a Joint Personal Loan?
Is a Co-Signer Required When Applying for Loans as an 18-Year-Old?
Not all lenders require a cosigner, so be sure to ask if you’ll need one. In most cases, a loan without a cosigner will likely have a lower loan amount and a higher interest rate.
What exactly is a cosigner? Simply put, it’s a person who agrees to take responsibility for a loan alongside the primary borrower. If one person fails to make payments, it will affect the other person’s credit score.
Applying for a loan with a co-borrower or cosigner can be a quick way to get accepted for a loan.
Understanding Your Loan Status
Like many financial processes, applying for a loan involves multiple steps. Here’s a general idea of what’s involved:
• Pre-approval: Pre-approval means that your lender takes a look at your qualifications (including a soft credit check). A soft credit check is an inquiry of your credit report.
• Application: In this part of the process, you submit a formal application, and your lender will verify your information.
• Conditional approval: You may also get conditional approval for your loan, which means the lender may likely approve you to get a loan as long as you meet all the requirements.
• Approval or denial: Finally, you’ll either get approved or denied for the loan.
Your lender should be clear with you at every step of the application process.
Recommended: How to Get Approved for a Personal Loan
Private Lender Loan Requirements for 18-Year-Olds
There are no hard-and-fast requirements that encompass private lender requirements. However, lenders generally look at an applicant’s credit score, debt, and income.
Credit Score
There’s no universally set minimum credit score requirement for a loan because rules can vary by lender. It’s worth noting that low-to-no-credit borrowers may be able to access a loan.
Debt and Income
Lenders will check to see how much debt you have and calculate your debt-to-income (DTI) ratio, which ideally should be less than 36%. To figure out your DTI, lenders add up your debts and divide that amount by your gross income.
Lenders will also look at your income to ensure you can make monthly payments on your loan. This can include income from your job, a spouse’s income, self-employment, public assistance, investments, alimony, financial aid for school, insurance payments, and an allowance from family members.
Tips for Getting Loans as an 18-Year-Old
If you’re ready to get a loan as a young person, you can take steps to help boost your odds of getting approved.
Show Your Savings
Show the lender what you’ve saved in your accounts, which may include:
• High-yield savings accounts
• Certificates of deposit (CDs)
• Money market account
• Checking or savings accounts
• Treasuries
• Bonds, stocks, real estate, and other investments
Demonstrating savings can help you show that you can repay your loan.
Show Proof of Income
Lenders will likely require you to provide proof of income so they can see how you’ll pay for your loan. But remember, this doesn’t mean just the money you earn from a job. Consider other types of income you receive. For instance, you may not initially think of alimony as a source of income, but a lender might.
Apply for a Lower Amount
Lenders may deny your loan if you choose to borrow more money than you can realistically repay. So if you’re young and have no credit history, you may be able to increase your chances of getting a loan if you apply for a lower amount. You may also want to consider this strategy if you’re denied for a loan and want to reapply.
💡 Quick Tip: Just as there are no free lunches, there are no guaranteed loans. So beware lenders who advertise them. If they are legitimate, they need to know your creditworthiness before offering you a loan.
The Takeaway
While most 18-year-olds don’t have a large income or lengthy credit history, that doesn’t mean you can’t qualify for a personal loan. Just remember that funding choices may be more restricted, and you might not qualify for a large amount. If you’re having trouble getting approved, you may want to consider asking someone to cosign the loan, showing proof of income and savings, or applying for less money.
Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.
SoFi’s Personal Loan was named NerdWallet’s 2024 winner for Best Personal Loan overall.
FAQ
Are there loans for 18-year-olds without a job?
You can get a loan without a job. However, you’ll need to show a lender that you have some form of consistent income, such as through investments, alimony, financial aid, or another source of cash flow.
Are there loans for 18-year-olds without credit?
Yes, loans do exist for 18-year-olds with no credit history. But note that even if you qualify for a loan without credit, it may be a lower amount than you could qualify for if you had a lengthy credit history. You may also not be able to get a low interest rate.
Can I get a loan as an 18-year-old?
Yes, 18-year-olds can get a loan. Your age matters less than your credit history and credit score — or the availability of a cosigner. Keep in mind that you may have trouble getting a loan if you don’t meet a lender’s qualifications. Contact a lender to learn more about your options.
How can I build credit as an 18-year-old?
If you want to start building credit, it may be worth exploring a secured credit card. Similar to a debit card, this type of credit card requires you to put down a cash deposit to insure any purchases you make. For example, putting down a $1,000 deposit, and that becomes your starting credit line on your card.
Photo credit: iStock/SeventyFour
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Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Unsecured credit cards, which don’t require a form of collateral to use them, tend to be the most popular kind of credit card. In addition to helping you build credit, these cards often come with perks and benefits, like cash back rewards or free travel insurance.
To decide if an unsecured credit card is right for your financial situation, read on. You’ll learn what an unsecured credit card is, how it works, and the pros and cons of using one.
What Is an Unsecured Credit Card?
When you think of what a credit card is, you’re most likely thinking of an unsecured credit card. An unsecured credit card is a line of credit that gives cardholders the ability to use credit at their whim. In other words, as a cardholder, you can use your credit up to its limit and pay it off continuously, with no end date. Unsecured credit cards get their name since they don’t require a deposit or collateral, unlike secured credit cards.
Depending on the credit card you qualify for, you might be able to receive some additional benefits and perks with an unsecured credit card like cash back rewards.
How Does an Unsecured Credit Card Work?
You’ll receive a credit limit when you open an unsecured credit card. Your credit limit is the maximum credit you can use on this account. You must pay at least the credit card minimum payment each billing cycle if you’ve used the card. Here are some points to know:
• Your monthly payment will vary depending on how much credit you used during that billing cycle (in fact, some months, you may even have a negative balance on your credit card).
• If you miss a monthly payment, you’ll likely have to pay a penalty or fee for the infraction.
• If you make only the minimum monthly payment, your remaining balance (plus accrued interest based on the APR on a credit card) will carry over until the next month.
So, to avoid penalties, fees, and accrued interest, it’s best to pay your balance in full every month.
But, if this isn’t feasible with your budget, aim to pay more than the minimum every month so you can quickly chip away at your total outstanding balance. Just be sure to keep in mind how credit cards work when deciding how much to pay in a given month.
Pros and Cons of Unsecured Credit Cards
Some of the benefits and drawbacks of unsecured credit cards may be obvious. But, to help you determine the risks and rewards of using this type of credit card, here are some pros and cons to get familiar with.
Pros
Upsides of unsecured credit cards include:
• Higher credit limits: Applicants usually must have a competitive credit score to qualify for an unsecured credit card. For this reason, credit card companies may apply a higher credit card limit since you’ve proved your creditworthiness.
Also, having a higher credit limit can impact your credit utilization ratio, the amount of credit you use compared to the amount of credit you have available. Your credit utilization ratio is used to assess your credit score, and a higher ratio may negatively impact your score. With a higher amount of credit available, it’s easier to maintain a lower ratio.
• Potential to earn rewards: Many unsecured credit cards offer incentives like cash back or airline miles to encourage cardholders to use their credit. They may also offer additional benefits, such as complimentary airport lounge access or hotel credits. So, when comparing your unsecured credit card options, be sure to look at all perks and rewards that may be offered.
• Frequently reports credit history to credit bureaus. Since card issuers take on more risk by lending credit to cardholders, they usually report your credit activity to the credit bureaus on a monthly basis.
Your credit usage is another factor used to determine your credit score, so these regular reports can help you assess how well you’re managing your credit. If you’re managing it well, these frequent reports can help your score.
• An abundance of options: Unsecured credit cards are the most popular type of credit card. Therefore, there’s a vast array of credit card options at your disposal. Because there are so many options, you’ll likely be able to find one suitable to fit your needs.
Cons
While there are many advantages of using an unsecured card, some may come with some downsides, including:
• Varying approval requirements: Every credit card company usually has different credit card approval requirements, and you’ll generally need a higher score to qualify for an unsecured versus a secured credit card.
For example, some secured credit card requirements are a credit score of at least 580; others may require a score of at least 680. Researching requirements beforehand can help you identify the best cards available that you can qualify for with your credit score.
• Extra fees: Some unsecured cards may come with extra fees, such as convenience fees, cash advance fees, or foreign transaction fees. Keep in mind that not all cards charge these fees, though, so it’s worth it to compare your options based on your needs. For example, if you travel abroad often, you may want to choose a card that doesn’t have foreign transaction fees.
Pros
Cons
Higher credit limits
May charge additional fees such as convenience fees, balance transfer fees, or cash advance fees
Wide range of credit card options available
Different credit requirements for approval
Rewards such as cash back or miles
Usually report to credit bureaus
Unsecured vs Secured Credit Cards: What Are the Differences?
The most significant difference between unsecured versus secured credit cards is that secured cards require a deposit while unsecured cards don’t. Your deposit on a secured credit card usually dictates your credit limit. Depending on the credit card company and your credit score, your deposit may vary between $200 and $3,000, which is far lower than the average credit card limit.
Requiring a security deposit eliminates some of the creditors’ risks; thus, it can be easier to qualify for a secured credit card than an unsecured credit card. Keep in mind, no matter what type of card you have, you’ll find the most favorable terms if you have good credit, such as a good APR for a credit card. Also, you may have to forgo any rewards while you build your credit with a secured card, as they don’t often offer them.
If you fall behind on your payments, your creditor could cancel your card and send your remaining outstanding balance to a third-party collector with either an unsecured or a secured credit card. However, if you have a secured credit card and your payment is past due, your creditor may keep your security deposit to pay off some of the remaining balance.
Beyond these few items, there is no other real difference between the inner workings of a secured credit card and an unsecured credit card.
• Each card allows you to make purchases at locations that accept credit card payments.
• During the billing cycle, you must make at least a credit card minimum payment.
• Otherwise, you may have to pay fees or penalties with your secured or unsecured credit card.
Secured Credit Card
Unsecured Credit Card
Requires a refundable deposit
✓
X
Can qualify with poor credit
✓
✓
Can come with rewards
✓
✓
Requires at least a minimum payment every month
✓
✓
Used to make purchases
✓
✓
Who Should Consider an Unsecured Credit Card?
Since there are plenty of unsecured credit card options available, they can suit the needs of many different types of consumers. If you’re in the market for a new credit card, here’s how to decide if an unsecured card is right for you.
The Budgeter
If you’re big on budgeting, you can use an unsecured credit card as a tool to help you as you make a budget and stick to it. Many credit issuers offer online statements or apps that can make it easy to track all of your spending right on your phone.
But, if you’re going to use your credit card for all of your spending, make sure to keep the interest in mind. While unsecured credit cards can help you budget, they can also hinder you if you get into the habit of overspending.
The Frequent Flyer
Do you love spending your time on the move? Many unsecured credit cards provide travel rewards that help you earn free travel experiences. For example, some cards can come with reward points or miles that you can use toward booking airfare or accommodations.
You may also receive additional perks like annual hotel credits, access to airport lounges, or discounts on flights when using miles.
The Business Owner
Unsecured credit cards are also useful for business owners. Business owners can capitalize on the perks of unsecured credit cards like rewards, sign-up bonuses, and other benefits. Also, an unsecured card can provide short-term funding for business growth. Plus, it can help businesses build credit for future financing endeavors.
Of course, benefits and terms will vary depending on the type of card you choose.
Typical Requirements to Apply for an Unsecured Credit Card
When you apply for an unsecured credit card, you must meet certain criteria to qualify. Some common requirements when applying for a credit card include:
• Be at least 21 years of age. While this is generally the age required to get a credit card, if you’re over 18 and can prove you have an income, you may qualify.
• Provide proof of income to demonstrate you can make the minimum payments.
• Be a U.S. citizen or have the authority to work in the U.S.
• Have an acceptable credit score range per the lender’s requirements.
• Provide personal information such as your name, age, address, Social Security number, and more.
Keep in mind that all credit issuers have different criteria for approval. Some credit issuers may give you the option to pre-qualify. This way, you can see if you may qualify without submitting a hard inquiry on your credit, which can impact your credit score.
The Takeaway
Unsecured credit cards can come with many perks, such as earning cash back rewards and helping you build credit. But, before you apply for just any old card, make sure to compare your options, keeping the average credit card interest rate in mind, and understand the criteria for approval. Identifying an unsecured credit card that’s suitable for your needs might take a little time, but it’s worth it.
Whether you’re looking to build credit, apply for a new credit card, or save money with the cards you have, it’s important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
Is it good to have an unsecured credit card?
If you can handle an unsecured credit card responsibly, it can help you build credit. Also, it can be a good way to receive additional benefits, such as cash back or other rewards, for completing your daily transactions.
What credit score do I need for an unsecured credit card?
Typically, if you have a credit score of 579 or less, credit issuers may be reluctant to approve your application. To qualify for the most competitive rates and offers, you typically want to have a credit score of 670 or higher.
How long before I can get an unsecured credit card?
If you’re working on building credit and don’t qualify for an unsecured credit card, you may have to start with a secured card. But, the amount of time you must use your secured credit card before you graduate to an unsecured time can vary from a few months to several years. Ultimately, it will depend on factors like your current credit score and the criteria of the unsecured credit card you’re applying for.
Photo credit: iStock/Zhonghui Bao
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Do you want to learn how to move out at 18 with no credit, little money, or even no money? Here’s what you need to know. There are many reasons for why you may want to move out at a young age – perhaps you have a difficult home life, you want to move somewhere…
Do you want to learn how to move out at 18 with no credit, little money, or even no money? Here’s what you need to know.
There are many reasons for why you may want to move out at a young age – perhaps you have a difficult home life, you want to move somewhere new, or you just want your own space.
I moved out shortly after turning 18 (about a week or so after my 18th birthday) into a rental home, and while I was not prepared at all, I do think being prepared to move out at a young age is extremely helpful. I made many mistakes that led to many, many tears, money wasted, stress, and more.
Today, I want to help you avoid as many problems as you can.
After all, moving out at 18 years old (or any other young age) is already really hard, and there is such a huge learning curve.
Moving out when you turn 18 is a big step into becoming an adult. Even though it can be exciting, moving out for the first time needs to be planned carefully. Before you leave, it’s important to make a plan to make sure you can afford it and stay on your own.
This means finding a job, making a budget you can stick to, and saving money for unexpected costs.
How To Move Out at 18
Below are ways to move out at 18.
Recommended reading: Buying a House at 20 (How I did it)
Make a plan to move out at 18
I highly recommend having a plan if you want to move out at 18 years old.
Moving out at 18 is a big step, and making a plan will help everything go a little more smoothly.
You will want to think about things such as:
Where you will work
How you will pay your bills
If you will live with a roommate or on your own
What your budget will be like
What you’ll do if things get tough, such as if you can’t afford your rent
What you will do for health insurance and medical bills
And so much more.
I will be going further in-depth on many of these below.
Find ways to make money
If you are 18 and want to move out, then you will need to have a stable source of income, of course. There are many options for earning money, from traditional jobs to more flexible side hustles.
A full-time job typically gives you more hours and benefits like health insurance, which are helpful when you’re living on your own. If you have other things going on, a part-time job might be better because it offers more flexibility while still giving you money (but, you may not earn as much money). You can find job openings online, at job fairs, or on community bulletin boards. Jobs like delivering food can be either full-time or part-time, and companies tend to need people.
If you want to make more money, you can side hustle to make extra income – a way to make extra cash that you do alongside your main job. You could freelance by doing things like writing, teaching tutoring lessons, or designing graphics. Or, you could babysit for families nearby, walk dogs, or help people with tasks or errands. These little jobs can add up to a lot of money and give you the flexibility to work when you want.
When I was young and first moved out, I worked full-time at a retail store. I also eventually started a few side hustles (like blogging, freelance writing, and selling stuff online) so that I could pay off my student loans quickly. Living on your own is not easy, especially when you are young and your income is not that high – so side hustles may be needed so that you can make enough money to pay your bills.
Some helpful articles to read include:
Create a budget
When you’re ready to step out into the world at 18, you need a budget. I can’t think of any young adult who would not need a budget.
Budgets are great because they help you keep track of your money coming in and going out. With a monthly budget, you’ll know exactly how much you can spend on different things each month as it helps you see how much money you have and where you might need to cut back on spending.
A budget will help you to figure out if you can afford to live on your own, if you need to have roommates, or if you need to find a cheaper living arrangement.
Making a budget is easy. First, write down how much money you make each month from your job or other places. Then, write down what you need to spend money on each month, like:
monthly rent
food
phone bill
internet
car
fuel
utilities like electrical, water, trash, sewer, gas/propane
car insurance
medical/health
pet care
restaurants
cable, satellite, or any TV monthly subscriptions
household essential items, like toilet paper, trash bags, etc.
and some money for fun stuff too
Knowing your monthly expenses will help you to better manage your money so that you won’t go into credit card debt.
Recommended reading: The Complete Budgeting Guide: How To Create A Budget That Works
Save for the move (and open a bank account)
When you’re getting ready to move out at 18, saving money is obviously very important. If you can help it, I do not recommend moving out with no money saved.
Think about all the costs you’ll face – like rent, your first security deposit, food, and any unexpected things that pop up. You’ll want to tuck away money for this.
How much should you save to move out? A good rule is to save at least three to six months of living expenses. For example, if you spend $1,500 a month, aim to save between $4,500 and $9,000 before you head out on your own.
This will be your emergency fund. An emergency fund is money you save up for unexpected things that might happen. This could be paying bills if you lose your job or if your hours or pay get reduced. It could also cover unexpected expenses like a car repair, medical bill, or fixing a broken window.
An emergency isn’t something like buying a birthday present, a new TV, or going on vacation.
Having an emergency fund is smart because it can stop you from getting into debt you don’t need. Some people rely on their credit cards for emergencies, but that’s not a good plan.
I also recommend getting your own bank account for all of the money you save. It’s a safe place for your money, and it helps you track what you earn and spend. Plus, you’ll need it for things like direct deposit from jobs or paying bills online.
I personally use Marcus by Goldman Sachs for my savings account as they have a very high rate. You can get up to 5.50% at the time of this writing through a referral link bonus. According to this high-yield savings account calculator, if you have $10,000 saved, you could earn $550 with a high-yield savings account in a year. Whereas with normal banks, your earnings would only be $46.
Improve your credit score and history
When you’re moving out of your parents’ home, having a good credit score is super helpful. This is because your credit score and credit history may be used for things like getting approved for an apartment and getting signed up for utility bills.
If your credit score is low, then you may be denied an apartment and even have to pay large deposits to get signed up for utilities (like water and electric).
Here are some important things to know:
Understand credit utilization – This is all about how much credit you’re using compared to how much you have. Try to use less than 30% of your credit limit. Say your card has a $1,000 limit. Aim to spend no more than $300.
Always pay on time – You should pay every bill on time, every time. Even being a little late can hurt your credit score a LOT!
There are other ways to improve your credit, such as by getting a secured credit card or becoming an authorized user on a family member’s credit card.
Here are two really helpful articles I recommend reading:
I also recommend keeping an eye on your credit by checking your score and report. Sites offer free checks, and it’s good to know where you stand. That way, you can fix any mistakes fast.
Think about where you’ll live
When planning to move out at 18, picking where you’ll live is a huge step.
Here are some things to think about:
Think about who you’ll live with. Living by yourself can be expensive so sharing rent and other bills with roommates can save you money, but make sure you choose your roommates wisely. You’ll be sharing your space with them, so it’s important to pick people who are responsible and trustworthy (and will actually pay the bills!).
Try using online tools to compare different areas. You can check things like crime rates, public transportation options, and how close they are to places you need, like grocery stores.
Think about the cost. Can you pay the rent and utility bills every month? Make sure to include these costs in your budget. Sometimes, living a bit farther from popular areas can be cheaper.
For my first home, I rented a very small 400-square-foot home with no real bedroom. But, it was within my budget and next to my college (I lived a few miles away), and surprisingly affordable.
Talk to your parents
When you’re getting ready to move out at 18, it’s important to have a conversation with your parents. This might feel hard or even impossible, but remember that clear communication is important.
I recommend choosing a time to tell them when your parents aren’t too busy or stressed as having this conversation when everyone is relaxed can make it easier for everyone to talk openly.
I think it is also helpful to think about how your parents might feel. If you’re the first to leave the home, they might find it tough. Try to understand their perspective and mention that you’ll stay in touch and visit.
And, be ready to show them your plan. Your parents will want to know you’ve thought things through. If you’ve been saving money, let them know. Talk about your job and how you’re managing to support yourself. It’s good to tell them about the place you’re planning to move into and how you chose it.
How to move out of your parents if it isn’t safe
So, after reading the above, I know that some of you may not have a good home life. You may not feel safe telling your parents that you are moving out.
If that’s the case, then I recommend reading this section.
Sometimes, home isn’t the safe place that it’s supposed to be. If you’re in a tough situation and need to leave at 18 but can’t talk to your parents about it, you’re not alone.
Here’s what you can do:
Find an adult you trust – Look for someone you trust, like a teacher, counselor, or family friend. They can maybe give you support and help you figure out your options.
Plan ahead – Start thinking about where you’ll go and how you’ll support yourself. Look into shelters, transitional housing programs, or staying with a trusted friend or relative.
Know your rights – As you turn 18, you have rights. Learn about your options for housing, education, and employment because there may be resources available to help you.
Stay safe – If you’re in danger at home, prioritize your safety. Contact local authorities or organizations that can help you leave safely.
Take care of yourself – Moving out can be tough, but remember to take care of yourself emotionally and physically, such as by talking to friends, finding support groups, or talking to a counselor if you need to.
Leaving home at 18 without being able to talk to your parents is hard, but it’s not impossible. Reach out for help, make a plan, and remember that you deserve to live in a safe and supportive environment.
Get free stuff for your new home
One of the big challenges of moving out on your own is affording all of the different things that you need.
Luckily, there are ways to get things for free or really cheap.
Some of the top ways include:
Facebook Buy Nothing groups – This is my favorite place to start if you want to get things for free. These groups promote recycling and reusing items instead of throwing them away when you’re done with them. To begin, look for and join a local Buy Nothing group on Facebook. You can search for groups for your city. People list their free stuff all the time, such as furniture, electronics, clothes, and more. You can even make a post asking if anyone has something that you need.
Ask family and friends – Your family and friends might have extra stuff they’re willing to part with. They might even be happy to see it go to a good home – your new home!
Check online platforms – Websites like Craigslist, Freecycle, and Facebook Marketplace can be goldmines for free furniture. People often list items they want to get rid of quickly.
Visit thrift stores and yard sales – Thrift stores and yard sales sometimes offer “free bins” or low-cost items they want to get rid of fast.
Attend college move-out days – If you live near a university, go there on move-out day. Students tend to leave behind perfectly good furniture that’s yours for the taking.
Community centers and churches – These places often have bulletin boards with listings for free items.
Always be safe when arranging pickups, especially with strangers. Always bring a friend or let someone know where you’re going.
Helpful articles:
Handling utilities and bills
Dealing with utilities and bills is a big step in moving out. Utilities are services you need like water, electricity, gas, and the internet.
Before you move, call or visit the websites of local utility companies. You’ll need to set up accounts in your name. This might include a deposit fee, so be ready for that.
I recommend making a list of all your expected bills. Rent, electricity, water, internet, and maybe gas are usually the basics. Add them up to see how much you’ll spend each month.
After you move in, you will want to find out when each bill is due. It’s your job to pay them on time as paying late can lead to extra fees or even getting your services turned off. Some companies let you set up automatic payments, and this means the money comes out of your bank account on its own each month. This can make sure you’re always on time.
You will want to hold onto your bills and receipts. This way, if there’s ever a mistake with a bill, your records will help fix it.
You can save money by being smart about using your services. Turn off lights when you leave a room and unplug electronics that you’re not using. You might also shop around for better deals on services like the internet.
After you get your first set of bills, you will understand why your parents wanted to keep the air conditioning off or why they always asked you to turn the lights off – things can be expensive!
Also, remember that different times of the year will impact your bills. For example, your electric bill will most likely be a lot more expensive in the summer than it will be in the spring or fall.
Maintain your home (housekeeping)
Moving out at 18 means taking on the responsibility of housekeeping. You might be surprised how quickly your new home can become cluttered and get dirty.
Keeping your home nice starts with regular cleaning, and I recommend setting aside some time each day for tasks like washing dishes, making your bed, and tidying up the living area. This way, messes won’t pile up and become overwhelming.
Then, once a week, dedicate your time to deeper cleaning such as vacuuming, mopping floors, cleaning the bathroom, dusting, and doing laundry.
Housekeeping also requires tools and supplies, so you will want to plan your budget to include items like sponges, cleaners, and trash bags.
Make friends in your new community
Moving out at 18 is a big step, and making friends in your new community is important. It can make your new place feel like home. When you move, you might not know many people, but there are fun and simple ways to meet people.
Here are some tips:
Get to know your neighbors – Start with a smile and say hi to your neighbors.
Join local groups or classes – Look for groups that interest you. Love to paint? Find an art class. Enjoy cooking? Maybe there’s a cooking group nearby. Like rock climbing? Go to the local climbing gym. This way, you meet people who like what you like.
Visit community centers – Many towns have a community center. They have activities like sports, games, and events.
Making friends might take time, but it’s totally possible! Just be yourself and be open to talking to new people.
Balancing work and personal life
I’m guessing you will have a lot going on, between trying to work full-time and enjoying your life, and even possibly furthering your education.
I recommend trying to schedule your time so you don’t get too busy. Use a calendar or app to make sure you’ve got time for work, taking care of your place, and doing fun things too.
It’s okay to say no if you’re too busy. If you’re working a full-time job, you might not be able to hang out with your friends all the time. It’s all about finding a healthy balance between earning money and enjoying life. I had to say no to my friends many times because I was simply too busy. If your friends still live at home, it may be hard for them to understand this unless you explain your situation.
Plus, remember to take breaks. When you’re planning your week, set aside some time just for relaxing. Watching a movie, reading, or hanging out in the park are all great ways to unwind and give your mind a break.
Frequently Asked Questions
Below are common questions about how to move out at 18 years old with little money.
How can I move out fast at 18?
To move out quickly, focus on making a steady income and finding affordable housing. Create a budget to manage your expenses and look for immediate job openings or housing options. Saving as much money as you can right now is also super helpful.
How much money should I have saved by 18 to move out?
Aim to save at least 3 to 6 months of living expenses before moving out. This safety net can cover rent, groceries, and unexpected costs, giving you financial stability as you start on your own.
Can you move out at 18 while still in high school?
Yes, you can move out at 18 while in high school, but make sure you have a support system in place. Balancing school responsibilities with living independently can be very hard.
How to move out at 18 with strict parents?
When moving out at 18 with strict parents, communicate your plans clearly and respectfully. Prepare a well-thought-out plan to show them you’re serious and capable of managing your own life.
Can your parents not let you move out at 18?
When you turn 18, you’re legally an adult in most places, and you can decide to move out even if your parents don’t agree. However, it’s important to respect their opinion and explain your reasons. There are some places where you have to be older, so make sure you do your research.
Do I have to tell my parents I’m moving out?
While you’re not legally required to inform your parents in most places, it’s nice to talk about your decision with them, as transparent communication helps maintain a positive relationship after you leave.
Can I move out at 18 without parental consent?
Yes, in most places, at 18 you’re legally permitted to move out without parental consent. You will want to make sure this applies to your local area.
What things do you need when moving out of your parents’ house?
There are many things that you will need to move out of your parents’ house such as a bed, blanket, pillow, kitchen supplies, towels, a place to eat, a dresser, cleaning supplies, groceries, and more.
Is it realistic to move out at 18?
It is realistic to move out at 18 if you have a reliable income, a budget, and a plan for handling responsibilities. You will want to be as prepared as possible to move out at a young age because there will be many hurdles thrown your way, most likely.
How To Move Out At 18 – Summary
I hope you enjoyed this article on how to move out at 18 years old.
It’s really important to have a plan for a successful move when you are just 18 years old.
You’ll need to find ways to earn money regularly, like getting a job and even doing extra work on the side.
Having savings in the bank and an emergency fund will help you handle unexpected expenses without ruining your plans.
There are also many other things to think about, such as the cost of living, utility bills, your credit score, and more.
I moved out when I was just 18 years old, so I completely understand where you are coming from. I had no financial help from my parents and found and did everything on my own – from making money to finding a place to live, making all of my own meals, and more. It was hard, but it was what needed to be done.
Do you plan on moving out soon? Do you have any questions for me on how to move out at 18?
The information provided on this website does not, and is not intended to, act as legal, financial or credit advice. See Lexington Law’s editorial disclosure for more information.
To build credit as an immigrant, you need an SSN or ITIN to open a bank account and apply for credit cards. You may also be able to transfer your credit score from your home country with a global credit scoring bureau.
Immigrants have always been a key part of what makes the United States a great country. A recent study shows that roughly 13.7 percent of the U.S. population consists of immigrants. Unfortunately, as an immigrant, it can be difficult to build a credit score and get access to funds, as well as other services that might require individuals to have a credit score.
Although it’s difficult to build credit as an immigrant, it’s possible. Here, we go over how to start building credit, the importance of having a credit score, and ways to improve it. With this information, you may be able to access credit cards, get loans, and potentially purchase a home. Keep reading to learn more about building credit as a new immigrant.
Why should immigrants build their credit score?
Having a credit score and good credit history can help you rent an apartment and purchase a vehicle or a home. Some employers might check your credit, and your credit may also affect how much of a deposit you need to put down to rent or access services like utilities.
Once you establish credit, it’s important to continue improving your credit score. A better credit score means lower interest rates, lower deposit amounts, and access to more funds. A good credit score starts at 670 using the FICO® scoring model, but it can go as high as 850 and as low as 300.
To get started, you can either transfer your credit score from a global bureau or go through the process of getting a Social Security number (SSN) or Individual Taxpayer Identification Number (ITIN).
Does your credit history transfer from your country of origin?
The United States isn’t the only place that uses credit scores, so you may have a credit score from another country. Credit scoring models can vary between countries, so if you have a credit score from your home country, you’ll need to work with a global credit scoring bureau to transfer it.
Where to start building credit in the U.S.
To start building credit as an immigrant in the United States, there are steps that you need to take. You can then build credit to buy a home or a vehicle or use it to access additional funds to start a business or make purchases.
Apply for a Social Security number (SSN): An SSN is often needed to open bank accounts and apply for loans. If you can’t get an SSN, you may be able to use an Individual Taxpayer Identification Number (ITIN).
Open a U.S. bank account: Bank accounts don’t affect your credit, but some credit card issuers require a bank account. You may also be able to use the bank from your home country if they have locations in the U.S.
Apply for a credit card: A credit card is the first big step toward building credit. Without credit history, the amount may be low. If you have a low score or no credit history, you can get a secured credit card.
5 ways to build credit as a new immigrant
Once you establish a credit score, there are some credit hacks that you can use to strengthen it. Below are five ways to start building credit or improve poor credit.
1. Get a secured credit card
There aren’t specific credit cards for immigrants, but as we mentioned, if you have no credit or bad credit, a secured credit card can be one of the best ways to start building it.
Unlike a standard credit card, where you borrow money from the issuer, a secured credit card uses your own funds. With a secured credit card, you make an initial deposit, which becomes your credit limit. As you use it, your issuers will report the payments (or lack thereof) to the credit bureaus, impacting your score.
2. Become an authorized user
One of the reasons it’s difficult to get a credit card as an immigrant with no credit history is that banks may see you as high risk. If you have a friend or family member with a credit card, they can add you as an authorized user to their account. Becoming an authorized user gives you a credit card that’s linked to the primary cardholder’s account. As long as this person is making the payments on time, you benefit from their credit history.
You don’t have to use the card to benefit from the primary cardholder spending and making payments. However, you can harm their score if you’re late or miss payments for transactions you made with the card.
3. Report your rent and bills
Typically, rent and bills don’t impact your credit score, but some services allow you to report your rent and other bills for a slight boost. These services include Credit.com’s ExtraCredit service or Experian® Boostcredit builder loans can help. These loans are specifically for those trying to build credit—as you repay your loan, the creditor reports the payments to the credit bureaus. Unlike a traditional loan, you get access to the funds after you pay it off.
How long does it take to build credit in the U.S.?
The amount of time it takes to build your credit will differ for everyone. For example, if you can transfer your good credit score from your home country, it may not take much time. If you’re starting with bad or no credit, it may take months to build your credit. Once your payments start getting reported, you should begin seeing changes to your credit score.
Start building credit as a new immigrant today
If you’re a new immigrant trying to build your credit in the United States, the best place to start is educating yourself. Your credit score, as well as the details of your credit report, can give you an idea of where you stand and where you need to improve. Here at Lexington Law Firm, we have various tools to help you better understand your credit score. Get your free credit assessment today.
Note: Articles have only been reviewed by the indicated attorney, not written by them. The information provided on this website does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client or fiduciary relationship between the reader, user, or browser and website owner, authors, reviewers, contributors, contributing firms, or their respective agents or employers.
Reviewed By
Paola Bergauer
Associate Attorney
Paola Bergauer was born in San Jose, California then moved with her family to Hawaii and later Arizona.
In 2012 she earned a Bachelor’s degree in both Psychology and Political Science. In 2014 she graduated from Arizona Summit Law School earning her Juris Doctor. During law school, she had the opportunity to participate in externships where she was able to assist in the representation of clients who were pleading asylum in front of Immigration Court. Paola was also a senior staff editor in her law school’s Law Review. Prior to joining Lexington Law, Paola has worked in Immigration, Criminal Defense, and Personal Injury. Paola is licensed to practice in Arizona and is an Associate Attorney in the Phoenix office.
A secured credit card is a bit different than an unsecured credit card. It’s an unsecured card that most of us think of as a traditional credit card. The difference between a secured card and an unsecured card is that a secured card requires a security deposit to get. That deposit is either a down payment on your credit line or your entire credit line.
And because building credit requires having credit to use, secured credit cards are a fabulous way to fill the gap for those that don’t have a credit history or who’ve ended up with a bad or poor credit rating. And roughly 30% of Americans have bad credit or poor credit, which is almost 70 million people
And with poor credit, you can find it difficult or even impossible to get a car loan or mortgage. It can even make getting an apartment lease tough. And it can make getting a traditional credit card tough too. And even if you can get a loan, lease or credit card, your bad credit will cost you in higher interest rates and monthly payments.
There’s no instant cure for bad credit, but you can improve your score with work and careful planning. One of the ways you can improve that score is with a secured credit card.
Are you asking: “What is a secured credit card?” Keep reading for an explanation of what one is and how it can help build or rebuild your credit score and/or credit history.
What Is a Secured Credit Card?
Some credit card issuers offer secured credit cards. These cards are an option for those with less-than-perfect credit scores or no credit history. But, they have a catch. That catch is a required deposit.
OpenSky® Secured Visa® Credit Card
No credit check to apply. Zero credit risk to apply!
Looking to build or rebuild your credit? 2/3 of cardholders receive a 48+ point improvement after making 3 on-time payments
Extend your $200 credit line by getting considered for an unsecured credit line increase after 6 months, no additional deposit required!
Get free monthly access to your FICO score in our mobile application
Build your credit history across 3 major credit reporting agencies: Experian, Equifax, and Transunion
Add to your mobile wallet and make purchases using Apple Pay, Samsung Pay and Google Pay
Fund your card with a low $200 refundable security deposit to get a $200 credit line
Apply in less than 5 minutes with our mobile first application
Choose the due date that fits your schedule with flexible payment dates
Join over 1.2 million cardholders who’ve used OpenSky to build their credit
Need more credit?
When you apply for a secured credit card, the credit card issuer takes a refundable security deposit. That deposit gets you approved for the card and for a small credit line. The credit line is usually small like $200 or $500. But some cards offer higher credit lines—even up to $3,000.
With most secured cards, your security deposit is your credit limit. Your deposit acts as collateral against any payments you might miss and your poor or absent credit rating. Since your deposit equals your total credit limit in most cases, the issuer won’t lose money if you miss a payment.
Secured Vs. Unsecured Credit Cards
The other main form of credit card is an unsecured credit card. Credit card issuers don’t require a deposit when for traditional unsecured credit cards.
You can have a good credit score and still get turned down for an unsecured credit card based. For example, they may turn you down if your annual income isn’t high enough or if you have several other credit cards near their limit
Who Are Secured Credit Cards For?
Secured credit cards are intended for two types of cardholders:
Those who want and need to improve bad credit or poor credit scores
Those who need to start building on a limited or nonexistent credit history
Both of these types of cardholders are challenged with low credit scores.
If you fit into either of the above categories and as a result, you’re having trouble qualifying for a traditional credit card, secured credit cards could be a good solution.
Keep in mind that it’s still possible to be turned down for a secured credit card, particularly if you have a blemish like bankruptcy on your credit history.
How Secured Cards Help You Build Credit?
The major credit bureaus calculate your credit scores. They use many factors in modeling that score. While a secured card can’t fix all the issues that go into your score, like payment history, debt usage, credit history, account mix and credit inquiries, it can help you with most.
One of the big factors in your credit score is the percentage of on-time payments. The higher the percentage the better with 100% being ideal. Issuers that offer secured cards report your payments to the credit bureaus each month the same way they report unsecured credit card payments.
The best way to build your credit with a secured card is to use the card responsibly and make your monthly payments on time, every time. That way, you’ll build a positive payment history on your credit.
There are other ways to use your card to build your credit too.
The credit bureaus also look at how much of your credit you use—called debt usage. If you keep the balance on your secured card low, it helps boost your score. As a general rule, don’t use more than 30% of your credit limit if possible. Even better, use no more than 10%. Thirty percent of $500 is $150. Ten percent is $50. Following that guideline shows you can use credit wisely by not maxing out your card or cards.
Another factor credit bureaus look at is your account mix. You want a healthy mix of accounts. Long-term accounts increase your available credit limit, so they lower your debt usage. They also add to your account mix. Keeping your secured card—even if you’re not using it—is a good idea.
Note though, if you apply for too many credit cards, it can hurt your score. Each application puts a hard inquiry on your credit report. So, find one card and apply and only apply for another if you’re declined. Also, consider applying to cards that don’t check your credit history like the OpenSky® Secured Visa® Credit Card or one that prequalifies you with a credit check like the Merrick Bank Secured Credit Card.
Merrick Bank Secured Credit Card
Choose your own credit line based on how much money you want to put down as a security deposit.
Initial deposits can be from $200 to $3,000. You can increase your credit line at any time by adding additional money to your security deposit, up to $3,000.
After 9 months, we review your account for a credit line increase. No additional deposit required!
Secured Credit Cards are great for people looking to build or rebuild credit and are available to people with all kinds of credit backgrounds.
Unlike a debit card or a pre-paid card, it helps build your credit history. We report your payment history to all three major credit-reporting agencies.
Get your FICO® Credit Score for free each month.
Fraud coverage if your card is lost or stolen. Access your account 24 hours a day, 7 days a week. Get help staying on track with available Auto Pay and account alerts.
Card issued by Merrick Bank, Member FDIC.
Tips for Using a Secured Card Wisely
Getting a secured card is only the first step. You must use the card in a smart manner to get the most benefit from it.
You might find yourself tempted to put the card away and never use it. That approach provides limited value for your credit score. It just shows up on your credit report as available credit.
You want to use the credit, a little, to prove you can use it responsibly. One way you can do that is through occasional small purchases.
For example, you can buy a parent or sibling a small gift they need, such as a blender or microwave. Then you pay that off over the course of a few months or in full at the end of the month.
Pay for minor car maintenance with it, like an oil change. Most oil changes come in under $75, which makes it something you can reasonably pay off in a month or two. You also get something useful and necessary out of the deal.
Don’t use your card for impulse purchases. Your credit limit might cover the cost of a video game or new jacket you want. Give yourself a two-day cooling off period and then ask: “Is that the best use of my credit card?” In most instances, the answer is no. Those kinds of purchases eat up credit you might need for an emergency, without providing much value in return.
Is There a Downside to Secured Cards?
Secured cards can have higher interest rates—dubbed annual percentage rate or APR—than other credit lines, though APRs vary a lot from card to card. There are many secured cards that have better APRs than traditional credit cards—especially rewards credit cards that charge higher interest rates to make up for the rewards you earn.
For example, the Applied Bank® Secured Visa® Gold Preferred® Credit Card at publication time has an ongoing APR of just 9.99% Fixed and the First Progress Platinum Prestige Mastercard® Secured Credit Card an ongoing APR of 15.24% Variable APR for Purchases.
Like any credit card, secured credit cards may charge an annual fee. Fees tend to range from $29 to $50. But, like traditional credit cards, there are secured cards that have no annual fee.
If you’re dreaming of earning points or cash-back with a secured card, you’re out of luck. These cards don’t come with added perks outside of helping you build credit. But, if you use it right and do build your credit, you’ll be on your way to qualifying for a rewards credit card before you know it.
Always make sure you understand exactly what the company offers before you apply. That way you can get a card that better suits your situation.
Parting Thoughts on Secured Credit Cards
You can answer the question, what is a secured credit card, by saying it’s an opportunity to build your credit.
When you can’t get an unsecured credit card, it makes rebuilding your credit more difficult. A secured credit card lets you establish that you can use credit responsibly, make on-time payments and keep an account in good standing.
Credit.com helps consumers by providing practical information about getting and using credit. To help you track your quest for better credit, and to find out where you stand before applying for a new credit card, get your free Experian credit score, right here on Credit.com. Your score includes a free credit report card that helps you track where you stand on payment history, debt usage, credit history, account mix and credit inquiries and how you can improve each area.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments.
A tax refund can be an opportunity to advance financial goals, whether you need a shovel to dig your way out of debt or a launching pad to generate more income.
The average tax refund in the 2023 tax season was $2,753, according to filing season statistics reported by the IRS. It’s a potentially robust amount that can make a difference if it’s prioritized in a way that makes sense for your situation. And you can set aside a sliver for fun or self care, as some experts suggest.
“Take a little bit of it — no more than 10% — and do something for yourself like treat yourself to a nice dinner, maybe a new outfit or something like that,” says Jessica Allen, an accredited financial counselor based in Tennessee.
Taking a small portion to spend however you want can encourage discipline and focus over decades to keep on track with your financial plan, according to Yusuf Abugideiri, chief investment officer at Yeske Buie, a Virginia-based financial planning firm. As for that 90% or more, allow your goals to dictate where it goes.
Here are some ways to use your tax refund to get ahead financially.
1. Build credit
If you need to build credit or get a second chance at it, consider using the tax refund to put down a deposit on a secured credit card. It’s not uncommon for some of these cards to require an upfront deposit of several hundred dollars.
When you’re researching secured credit cards, look for ones that have no annual fee; that offer a potential upgrade path to a traditional unsecured credit card; and that will report your payments to all three major credit bureaus (Equifax, Experian and TransUnion). With a good payment history, you can eventually get the deposit back after closing the card or graduating to a better card with the same issuer.
2. Pay off debt
If you’re carrying a high-interest balance on a credit card, a tax refund can help you ditch that debt more quickly. In addition, if you’re able to lower your credit card’s interest rate, you can make an even larger dent.
If you have multiple debts, consider one of two approaches: Tackle the one with the highest interest rate, through the debt avalanche method, or attack the smallest balance first, with the snowball method. Whichever debt you prioritize, remember that it’s still important to keep up with payments on all other debts.
Allen is a fan of the snowball method because it incentivizes people and builds confidence as they make more progress toward their goal.
“I don’t know about you, but when I accomplish a whole bunch of small goals I feel super-good and it makes me get to that bigger goal,” she says.
3. Save for an emergency
You could also put your tax refund toward an emergency fund — with a goal of getting that fund to at least $1,000 — to prevent you from accruing debt when the unexpected happens. Make the most of a tax refund by putting it in a high-yield savings account at an online bank, ideally one that offers an annual percentage yield of 4% or more.
If you’re debt-free, work toward saving the recommended three to six months’ worth of living expenses.
4. Invest in your ability to generate more income
If you’re looking to advance professionally, build a business or bring in additional income, a tax refund can propel those goals forward. Make yourself more marketable in a profession by earning certifications or training that will allow for more job opportunities or a salary increase. Or use a tax refund toward buying the training or equipment needed to start a business or side hustle.
5. Invest for retirement
When debt isn’t the focus, you can think about putting a tax refund to work in retirement accounts. If your company offers one, snag the match on a 401(k) by increasing your contributions, or fund a traditional or Roth IRA. In 2024, you can save up to $7,000 in an IRA ($8,000 if you’re 50 or older), and up to $23,000 in a 401(k) ($30,500 if you’re 50 or older). If you’re already on track with these goals, consider investing elsewhere.
“If IRAs and 401(k)s are already being addressed in a savings plan, you can look at just putting it in a brokerage account,” Abugideiri says.
A brokerage account is an investment account through which you can purchase stocks, bonds and mutual funds.
6. Save for your child’s education
With your financial ducks in a row, you can explore whether investing your refund in a tax-advantaged account like a 529 plan makes financial sense to save up for your child’s college education. However, don’t prioritize this option over other financial goals like retirement, and think carefully about the potential drawbacks.
For instance, your child may decide not to go to college, and penalties could apply if earnings are withdrawn for nonqualified expenses. Providing financial security for children may be a top priority, but a good way to do that is by taking care of yourself financially — to help them avoid having to do that for you down the line, Abugideiri says.
“You can take out a loan for college, but you can’t take a loan out to cover [all] your retirement expenses,” he says.
Credit card debt is a widespread issue that affects countless Americans, becoming a heavy burden that can disrupt financial stability and well-being. Whether due to unforeseen expenses, medical emergencies, or the convenience of online shopping, the roots of accumulating debt vary widely across individuals.
However, when debt reaches overwhelming levels, seeking ways to reduce or eliminate it becomes a critical goal. This is where the concept of debt settlement enters the picture—a strategy that involves negotiating with creditors to resolve a debt for less than the total amount owed.
The path to settling credit card debt might appear challenging, but armed with the correct information and strategies, it’s entirely possible to regain control over your financial destiny. This article aims to provide a comprehensive guide through the different paths available for settling credit card debt, ranging from self-managed methods to seeking professional assistance.
By gaining an understanding of your options, the steps involved, and the implications of each decision, you can make choices that align with your financial situation and objectives.
Understanding Your Debt Settlement Options
When faced with credit card debt, choosing the best strategy to reduce what you owe can seem overwhelming. However, understanding your options can simplify this process, making it clearer and more manageable. Whether you’re considering a do-it-yourself approach, thinking about seeking legal advice, or pondering the assistance of a debt relief service, it’s crucial to weigh the benefits and challenges of each method.
DIY Settlement Strategies
Settling debt on your own can be empowering and financially beneficial, as it saves you the fees associated with professional debt settlement companies. This approach requires you to directly contact your credit card company to negotiate a settlement—a lump sum payment that’s less than the total amount owed.
To succeed, you’ll need to be well-prepared: research your credit card company’s policies on debt settlement, understand your financial situation thoroughly to know how much you can afford to offer, and be ready to present your case persuasively. While this method demands significant time and effort, it allows you to maintain complete control over the negotiation process.
Consulting with a Debt Settlement Attorney
For those who prefer professional guidance, consulting with a debt settlement attorney can provide valuable legal insights and negotiation leverage. An attorney can evaluate your financial situation from a legal standpoint, offer advice on the feasibility of a settlement, and represent you in negotiations with creditors.
This option is particularly beneficial if you’re facing lawsuits from creditors or if your debt situation is complex. While hiring an attorney involves legal fees, their expertise can lead to more favorable settlement terms and protect you from potential legal pitfalls.
Engaging a Professional Debt Settlement Company
Debt settlement companies act as an intermediary between you and your creditors. These services negotiate on your behalf to reduce the total amount of debt you owe. Opting for a debt relief company can be a good choice if you’re uncomfortable handling negotiations yourself or if you have a significant amount of debt.
It’s important to do thorough research before selecting a debt settlement company: look for reputable companies with transparent fee structures and positive customer reviews. Keep in mind, however, that while a debt relief service can simplify the process, it also means you’ll pay a fee for their assistance, which is typically a percentage of the debt reduced or settled.
Evaluating Whether Debt Settlement Is the Right Choice for You
Deciding to settle credit card debt is a significant financial decision that requires careful consideration of your personal circumstances. It involves analyzing your financial situation, understanding the advantages and drawbacks of settlement, and considering other potential strategies for managing debt.
Assessing Your Financial Situation
The first step in determining if debt settlement is the right path involves a thorough assessment of your financial situation. This means taking stock of all your debts, including credit card balances, loans, and any other financial obligations.
Additionally, evaluate your income, monthly expenses, and any savings or assets you may have. This comprehensive financial overview will provide clarity on how much you can realistically afford to pay towards settling your debts. If you find that your debts far exceed your capacity to pay, and you’re experiencing financial hardship, debt settlement might be a viable option to consider.
The Pros and Cons of Debt Settlement
Before deciding on debt settlement, it’s essential to understand both the benefits and potential drawbacks.
Pros
Reduced debt: The most significant advantage is the possibility of paying off your debt for less than the full amount owed, potentially saving you thousands of dollars.
Avoiding bankruptcy: For many, working with a debt settlement company is a preferable alternative to bankruptcy, which has a longer-lasting impact on your credit scores.
Cons
Credit score impact: Settling your debt can negatively affect your credit score in the short term, as it involves paying less than the agreed-upon amount.
Potential fees: If you use a debt settlement company, you will likely incur fees, which can be substantial.
Tax implications: Forgiven debt may be considered taxable income, which could increase your tax liability.
The Step-by-Step Process to Negotiate Credit Card Debt Settlement on Your Own
Tackling credit card debt through settlement is a proactive approach to managing financial challenges. This process involves several key steps, each designed to help you successfully negotiate with credit card companies and reach a settlement that reduces your debt. Here’s a structured guide to navigating this journey on your own.
1. Educate Yourself on Debt Settlement
Begin by conducting thorough research on how to settle your debt. Learn about the process, its impact on your credit scores, and the legal factors involved. Become familiar with the typical practices in this area, including the average percentage by which debts can be reduced. Gaining knowledge in these areas is crucial and equips you for effective negotiation with credit card companies.
2. Inventory Your Debts
Compile a detailed list of all your debts, including credit card company information, outstanding balances, interest rates, and monthly payment amounts. This comprehensive overview will clarify the total amount you owe and help you prioritize which debts to settle first based on their impact on your financial health.
3. Analyze Your Financial Capacity
Assess your financial situation by reviewing your income, expenses, and available assets. This analysis will help you determine how much you can realistically afford to offer in a settlement without compromising your basic living needs. Creating a budget, if you haven’t already done so, is a crucial step in this process.
4. Organize Your Negotiation Strategy
Before contacting your credit card issuer, develop a clear negotiation strategy. Decide on the initial settlement offer you’re comfortable with and the maximum amount you’re willing to pay. Also, plan how to address any counteroffers from the credit card company. Having a strategy in place will help you navigate the negotiation process more effectively.
5. Establish Communication with Credit Card Companies
Initiate contact with your credit card companies to express your interest in negotiating a settlement. It’s often best to start this communication in writing, followed by phone calls. Be polite, concise, and clear about your financial situation and your desire to settle the debt.
6. Negotiate with Persistence and Patience
Negotiation is a process that requires both persistence and patience. A credit card company may initially resist your settlement offers, so be prepared to negotiate firmly but respectfully. Keep detailed records of all communications and offers made during the negotiation process.
7. Secure and Review the Settlement Agreement
Once you reach an agreement, request a written settlement agreement from the credit card company. Review this document carefully to ensure it accurately reflects the terms you negotiated, including the settlement amount and any conditions regarding the reporting of the debt to credit bureaus.
8. Fulfill the Settlement Terms Diligently
After securing the settlement agreement, adhere to the terms diligently. Make the agreed-upon payment by the specified deadline to ensure the settlement is honored. Once the payment is made, confirm that the account is reported as settled on your credit report.
Negotiating a credit card debt settlement on your own can be challenging, but with thorough preparation and a strategic approach, it’s possible to reduce your debt and move towards financial recovery.
Alternatives to Debt Settlement
Turning to a debt settlement company is only one of several strategies for handling overwhelming debt. It’s crucial to explore all available options to make an informed decision that aligns with your financial situation and goals. Here’s a more comprehensive look at the alternatives:
Debt Consolidation
Debt consolidation involves taking out a new loan to pay off multiple debts, effectively combining them into a single debt with one monthly payment. This approach is particularly beneficial if you can secure a consolidation loan with a lower interest rate than your current debts.
The advantages include simplifying your monthly payments, potentially lowering your overall interest rate, and providing a clear timeline for debt repayment. However, it requires a good credit score to obtain favorable loan terms.
Credit Counseling
Credit counseling agencies offer a valuable service for those struggling with debt. They work with you to create a personalized debt management plan (DMP) and can often negotiate lower interest rates and waived fees with your creditors.
Enrolling in a DMP means making a single monthly payment to the credit counseling agency, which then distributes the funds to your creditors according to the plan. A credit counselor can help you manage your debts more effectively without taking on new loans, but usually involves a small monthly fee.
Bankruptcy
Filing for bankruptcy is a legal process that offers a way out for those in severe financial distress. There are two main types of bankruptcy for individuals: Chapter 7, which liquidates your assets to pay off as much debt as possible, and Chapter 13, which sets up a repayment plan to pay back debts over time.
Bankruptcy can severely impact your credit scores and your ability to obtain future credit, but it provides a clean slate for those who have no other way to manage their debts. It’s advisable to speak to a bankruptcy attorney to understand the implications fully.
Budget Adjustments
Sometimes, the solution to managing debt is as straightforward as adjusting your budget. Reviewing your income and expenses meticulously to identify areas where you can cut back can free up additional funds to pay down your debt.
This might include reducing discretionary spending, canceling subscriptions, or finding ways to increase your income. While it requires discipline and may involve some lifestyle changes, this approach avoids the potential negative impacts on your credit score associated with other debt relief strategies.
Preparing for Life After Settlement
Successfully negotiating a debt settlement marks a significant milestone in your financial journey. However, the path to full financial recovery extends beyond just settling your debts.
Preparing for life after settlement involves taking proactive steps to monitor your credit report, rebuild your credit score, and develop healthy financial habits. These actions are crucial for ensuring long-term financial health and avoiding future debt issues.
Monitor Your Credit Report
After settling your debts, it’s important to regularly check your credit report from the three major credit bureaus—Equifax, Experian, and TransUnion. Ensure that the settled debts are accurately reported and reflect a zero balance.
Monitoring your credit report helps you catch and correct any inaccuracies or errors that could negatively affect your credit scores. It also keeps you informed of your credit status, which is essential for rebuilding credit. You’re entitled to one free credit report from each bureau per year through AnnualCreditReport.com, making it easier to keep tabs on your financial standing.
Rebuilding Your Credit Scores
Settling your debts can impact your credit scores, so focusing on rebuilding it is crucial. Start by making any remaining debt payments on time, as payment history is a significant factor in your credit scores.
Consider using a secured credit card, which requires a deposit that serves as your credit limit. Using this card responsibly and paying the balance in full each month can help demonstrate your creditworthiness and improve your credit scores over time. Additionally, keeping your credit utilization ratio low—below 30% of your available credit—is key to showing lenders you can manage credit effectively.
Developing Healthy Financial Habits
The final step in securing your financial future is developing and maintaining healthy financial habits. Create a realistic budget that accounts for your income, expenses, savings, and investments. Stick to this budget to avoid overspending and to ensure you’re saving adequately for emergencies and future goals.
Prioritize building an emergency fund with enough savings to cover at least three to six months of living expenses. This fund can help you avoid falling back into debt in case of unexpected expenses. Finally, continue educating yourself on financial management and seek professional advice when necessary to make informed decisions about investing and saving for the future.
Frequently Asked Questions
What happens if I miss a payment on a settled debt?
If you miss a payment on a settled debt, it could potentially void the settlement agreement, leading the credit card company to possibly demand the full original amount owed or take legal action against you. It’s crucial to adhere to the terms of the settlement agreement and make payments on time. If you foresee difficulties making a payment, contact the credit card company immediately to discuss your options.
Can I settle debt that’s already in collections?
Yes, you can settle debts that have been transferred to a collection agency. In fact, collection agencies might be more willing to negotiate a settlement since they acquire debts at a fraction of the original amount owed.
Negotiating with a debt collector follows a similar process to negotiating with the original creditor, but ensure any agreement is documented and that you understand the impact on your credit report.
How does debt settlement affect my ability to get new credit?
Debt settlement can impact your credit scores and might be viewed negatively by future lenders, as it shows you did not pay the full amount owed. This can make obtaining new credit more challenging, at least in the short term. However, as you rebuild your credit over time and demonstrate financial responsibility, lenders may be more willing to extend credit to you.
Should I use my savings to settle debts?
Using savings to settle debts can be a viable strategy, especially if it significantly reduces your financial burden and avoids accruing additional interest. However, consider keeping enough in your savings for emergencies.
Evaluate your financial situation carefully to make an informed decision. Consider working with a financial advisor to ensure you’re not putting yourself at risk for future financial emergencies.
How long does a settled debt stay on my credit report?
A settled debt typically remains on your credit report for seven years from the date of the original delinquency that led to the settlement. While the impact of the settled debt on your credit scores decreases over time, it’s important to focus on rebuilding your credit by maintaining good financial habits.
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Home » Credit » 6 Ways to Help Your Child Build Credit During College
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Our expert reviewers review our articles and recommend changes to ensure we are upholding our high standards for accuracy and professionalism.
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College students have a lot on their plate already, including the need to study to get good grades, participating in any number of on-campus activities and potentially working part-time to have some spending money.
That said, college students should also focus on their financial future, including steps they can take to build credit before they enter the workforce.
After all, having a credit history and a good credit score can mean being able to rent an apartment, finance a car or take out a loan, whereas having no credit at all can mean sitting on the sidelines until the situation changes.
Fortunately, there are all kinds of ways for young adults to build credit while they’re still in school. Some strategies require a little work on their part, but many are hands-off tasks that you only have to do once.
Teach Them Credit-Building Basics
Make sure your student knows the basic cornerstones of credit building, including the factors that are used to determine credit scores. While factors like new credit, length of credit history and credit mix will play a role in their credit later on, the two most important issues for credit newcomers to focus on include payment history and credit utilization.
Payment history makes up 35% of FICO scores and credit utilization ratio makes up 30% of scores.
Generally speaking, college students and everyone else can score well in these categories by making all bill payments on time and keeping debt levels low. How low?
Most experts recommend keeping credit utilization below 30% at a maximum and below 10% for the best possible results. This means trying to owe less than $300 for every $1,000 in available credit limits at a maximum, but preferably less than $100 for every $1,000 in credit limits.
Add Your Child as an Authorized User
One step you can personally take to help a child build credit is adding them to your credit card account as an authorized user. This means they will get a credit card in their name and access to your spending limit, but you are legally responsible for any charges they make. Obviously, this move works best when you have excellent credit and a strong history of on-time payments and you plan to continue using credit responsibly .
While this step can be risky if you’re worried your college student will use their card to overspend, you don’t actually have to give them their physical authorized user credit card.
In fact, they can get credit for your on-time payments whether they have access to a card or not. If you do decide to give them their credit card, you can do so with the agreement they can only use it for emergency expenses.
Encourage Them to Get a Secured Credit Card
Your child can build credit faster if they apply for a credit card and get approved for one on their own, yet this can be difficult for students who have no credit history. That said, secured credit cards require a refundable cash deposit as collateral are very easy to get approved for.
Some secured credit cards like the Ambition Card by College Ave even offer cash back1 on every purchase and don’t charge interest2. If your child opts to start building credit with a secured credit card, make sure they understand the best ways to build credit quickly — keeping credit utilization low and paying bills early or on time each month.
Opt for a Student Credit Card Instead
While secured credit cards are a good option for students with little to no credit get started on their journey to good credit, there are also credit cards specifically designed for college students. Student credit cards are unsecured cards, meaning they don’t require an upfront cash deposit as collateral, but charge interest on any purchases not paid in full each month.
Many student credit cards offer rewards for spending with no annual fee required as well, although these cards do tend to come with a high APR. The key to getting the most out of a student credit card is having your dependent use it only for purchases they can afford and paying off the balance in its entirety each billing cycle. After all, sky high interest rates don’t really matter when you never carry a balance from one month to the next.
Student Credit Cards…
“One of the safest ways for college student to build their credit by learning valuable money skills.”
Help Your Child Get Credit for Other Bill Payments
While secured cards and student credit cards help young adults build credit with each bill payment they make, other payments they’re making can also help.
In fact, using an app like Experian Boost can help them get credit for utility bills they’re paying, subscriptions they pay for and even rent payments they’re making. This app is also free to use, and you only have to set up most bill payments in the app once to have them reported to the credit bureaus.
There are also rent-specific apps and tools students can use to get credit for rent payments, although they come with fees. Examples include websites like Rental Kharma and RentReporters.
Make Interest-Only Payments On Student Loans
The Fair Isaac Corporation (FICO) also notes that students can start building credit with their student loans during school, even if they’re not officially required to make payments until six months after graduation with federal student loans.
Their advice is to make interest-only payments on federal student loans along with payments on any private student loans they have during college in order to start having those payments reported to the credit bureaus as soon as possible.
“Making interest-only payments as a student will not only positively affect your credit history but will also keep the interest from capitalizing and adding to your student loan balance,” the agency writes.
Of course, interest capitalization on loans would only be an issue with private student loans and Federal Direct Unsubsidized Loans since the U.S. Department of Education pays the interest on Direct Subsidized Loans while you’re in school at least half-time, for six months after you graduate and during periods of deferment.
The Bottom Line
College students don’t have to wait until they’re done with school to start building credit for the future, and it makes sense to start building positive credit habits early on regardless. Tools like a credit card can help students on their way, whether they opt for a secured credit card or a student card. Other steps like using credit-building apps can also help, and with little effort on the student’s part or on yours.
Either way, the best time to start building credit was a few years ago, and the second best time is now. You can give your student a leg up on the future by helping them build credit so it’s there when they need it.
20% APR. Account is subject to a monthly account fee of $2, account fee is waived for the initial six-monthly billing cycles.
College Ave is not a bank. Banking services provided by, and the College Ave Mastercard Charge Card is issued by Evolve Bank & Trust, Member FDIC pursuant to a license from Mastercard International Incorporated. Mastercard and the Mastercard Brand Mark are registered trademarks of Mastercard International Incorporated.
About the Author
Jeff Rose, CFP® is a Certified Financial Planner™, founder of Good Financial Cents, and author of the personal finance book Soldier of Finance. He was a financial planner for 16+ years having founded, Alliance Wealth Management, a SEC Registered Investment Advisory firm, before selling it to focus on his passion – educating the masses on the importance of financial freedom through this blog, his podcast, and YouTube channel.
Jeff holds a Bachelors in Science in Finance and minor in Accounting from Southern Illinois University – Carbondale. In addition to his CFP® designation, he also earned the marks of AAMS® – Accredited Asset Management Specialist – and CRPC® – Chartered Retirement Planning Counselor.
While a practicing financial advisor, Jeff was named to Investopedia’s distinguished list of Top 100 advisors (as high as #6) multiple times and CNBC’s Digital Advisory Council.
Jeff is an Iraqi combat veteran and served 9 years in the Army National Guard. His work is regularly featured in Forbes, Business Insider, Inc.com and Entrepreneur.
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Nearly 215 million U.S. drivers carry car insurance, and many may ask themselves, “Why is my car insurance so high?” If you’re one of those Americans, know that there are ways you can take control of the situation and reduce your insurance premiums.
We’ll guide you through why your car insurance may be higher than normal and ways you can proactively work to lower the costs.
1. Credit Score
Most insurance providers consider your credit score when determining insurance rates. Maintaining a good credit score can help individuals maintain a lower insurance premium. However, those with poor credit scores often need to pay more since they are seen as being higher risk.
Factors that impact your FICO® credit score include:
Length of credit history
Payment history
Credit mix
Amount owed
New credit
Keep in mind that credit score is only one factor used by insurers to set premiums.
2. Driving Record
Your driving record can significantly impact your insurance premium costs. Those with clean driving records without any traffic violations or accidents tend to pay lower insurance premiums. However, policyholders who have been in vehicle accidents and accrued traffic violations may pay for higher insurance premiums. Your insurance provider can increase your premium for:
Speeding tickets
DUIs and DWIs
Parking tickets
Your insurance may provide safe driver discounts to those with good driving records and who are accident-free for a required period. These discounts can decrease your insurance premiums.
3. Coverage Levels and Types
Your insurance rates can be significantly affected by the coverage type and insurance level you opt for. Depending on where you reside, your state has regulations and criteria for minimum policy coverage.
For example, Washington requires drivers to have the following minimum coverage:
$25,000 per person for bodily injury or death in an accident
$50,000 per person for bodily injury or death of any two people in an accident
$10,000 of injury to or destruction of property of others in an accident
Depending on other factors, like your vehicle type and whether it’s leased, you may require additional coverage on top of the minimum state requirements.
4. Claim History
Similar to your driving record, you want to keep your claim history as unscathed as possible. However, accidents happen, whether they result from your actions or those of another driver. Multiple filed claims can impact premium costs, especially if they are large claims, like a totaled vehicle. Plus, claims have a long-lasting impact—an at-fault accident can increase your rates for at least three years following the claim.
5. Location
Insurance premiums can greatly vary by location, especially if you live in a city versus a more rural area. Insurance premiums in each state are affected by various factors, including:
Rate of uninsured motorists
Frequency of filed claims
Minimum insurance limits
Things like road conditions and crime rates can also impact your auto insurance. For example, If you live in an area with high auto theft rates and poorly planned roads that are prone to cause accidents, you’ll likely be paying higher insurance rates.
6. Type of Vehicle
When insurers determine insurance premiums, they consider vehicle types. Certain car models have a lower likelihood of ensuring the safety of passengers or cost more to repair in the case of an accident, leading to higher insurance rates.
Vehicles that typically have higher rates are:
Smaller cars: Compact vehicles sustain more extensive damage in a crash, so they’ll usually have higher coverage rates.
Leased cars: Leasing companies typically require full coverage for leased vehicles, including comprehensive and collision coverage, to cover damage in a potential accident.
Cars with premium features: Trim levels and technological features, such as touch screens, can be expensive to repair when damaged. Providers keep this in mind when providing a premium. However, a vehicle with advanced safety features is at lower risk, resulting in a lower premium.
Vehicles that typically have lower rates are:
Small SUVs and minivans: Safer and bigger cars tend to have the most reasonable insurance rates.
Older cars: Most car values depreciate over time. In the case of an accident, your provider will need to pay out less than a newer vehicle. The exception is collector and classic vehicles.
Overall, newer, luxurious, smaller vehicles tend to have more expensive premiums.
7. Gender or Age
Gender can impact your insurance premiums in the majority of states. However, there are states that have banned gender in insurance rating, including:
California
Michigan
Massachusetts
Pennsylvania
North Carolina
Montana
Hawaii
Your age is another uncontrollable factor that impacts your insurance rates. Your insurer will likely charge you more if you have young drivers under 25 on your insurance policy. This is because they’re viewed as less experienced drivers with a higher risk of filing a claim.
8. Insurance Company
Rates vary across insurance providers. It’s easy to stick to renewing the same policy every year, but you could be losing out on savings by switching insurance companies. Among the leading auto insurance companies across the country, the average annual car insurance rate stands at $1,547 per year. Yet, a driver with identical coverage may pay as little as $1,022 with one company or as much as $2,135.
9. Driving Patterns
When you apply for insurance, expect your insurance provider to inquire about your occupation and residence. How often you drive and how much time you spend behind the wheel can increase your insurance premiums.
Those with longer work commutes increase their risk of being in an accident while they’re on the road. If you work in an expensive city and live in the suburbs outside the city to save on housing costs, you could, unfortunately, be paying a higher insurance rate.
10. Deductibles
Your deductible is the amount you would need to pay if your car is damaged and you file a claim. Your insurance provider pays the remaining total cost to fix your vehicle. For example, if you have a $500 deductible and file a claim for $2,500 in damages, you’ll need to pay the $500 and your insurance will cover the final $2,000.
If you pay for a lower deductible on your policy, there’s more risk for your insurance provider. Therefore, you’ll likely have to pay for higher insurance premiums.
11. Policy Add-ons
Take a look at your policy add-ons. You may be paying for additional coverage you don’t currently need. Evaluate whether it’s necessary to cover items like:
Car rental coverage
Roadside assistance
Comprehensive and collision coverage
While some of these additional coverage items can be beneficial, they aren’t essential expenses.
12. Car Insurance History
Your car insurance history can impact your insurance premium costs. If you have lapses in your insurance history, periods where you didn’t hold insurance, you can be penalized with higher premiums. Reasons for having gaps in your insurance history include:
Being dropped from your insurance provider
Your insurance expires and you can’t review your policy
You don’t have a vehicle and therefore don’t require auto insurance
You should always have auto insurance when you own a vehicle. Consider acquiring nonowner car insurance if you don’t own a vehicle—it provides coverage when driving cars you don’t own and prevents future premium increases when you do own one.
5 Ways to Lower Your Car Insurance Premium
As noted above, various factors can skyrocket your car insurance costs. Luckily, there are steps you can take to help lower your premiums and keep more money in your pocket.
1. Maintain a Good Credit Score
Your credit score can greatly impact how expensive your premium is. Improving your credit can help you find lower premiums in the future. Actions that can potentially improve a credit score is:
Reviewing your credit report for inaccuracies and errors and correcting them
Paying off any outstanding revolving debt
Opening a secured credit card if you don’t qualify for a traditional card
Completing payments on time
Improving your credit takes time, especially if you have multiple derogatory marks on your report. Be patient and smart while building your credit back up.
2. Get Rid of Unnecessary Coverage
Review your current coverage and evaluate whether you’re paying for add-on coverage you don’t need. For example, if you aren’t frequently renting cars, you likely don’t need car rental coverage. If you do rent a car for occasions like a business trip or vacation, your insurance should cover any damage caused to the rented vehicle.
3. Bundle Your Policies
For homeowners, bundling your home and auto policies can help lower your premiums. We recommend comparing bundling quotes from both of the providers before deciding which provider policy to cancel. Not only can you potentially save on both your premiums, but you will also be able to manage these expenses with one provider.
4. Raise Your Deductible
Opting for a higher deductible on your car insurance can help lower your premium rate. Your deductible is what you would pay “out of pocket” in a claim. However, you should be able to pay your deductible in case of an accident. If you increase your deductible too much, your insurance won’t cover smaller damages and repairs.
5. Compare Multiple Quotes
Has it been a while since your insurance premium was set? Shopping around at different insurance providers is the easiest way to get a lower insurance premium. If it’s time to renew your policy and you have a clean driving record, it may be a good time to compare quotes and see if other providers can provide a lower premium.
FAQ
Below are frequently asked questions about car insurance expenses and factors.
Does My Credit Score Affect My Car Insurance Rates?
Your credit score is factored in when your provider calculates your insurance premiums. Those with poorer credit scores (below 580 on the FICO scale and below 601 on the VantageScore® scale) tend to pay higher rates than those with good credit scores. Improving your credit score will help you secure favorable insurance rates and in other financial situations, like when you’re applying for a loan.
How Can I Lower My Auto Insurance Premiums?
There are a few actions you can take to potentially lower your insurance premiums, including:
Purchase a smaller, older vehicle
Remove unnecessary policy add-ons
Improve your credit
Raise your deductible
Bundle your home and auto policies
Shop around for rates
Why Does It Cost More to Insure an Expensive Vehicle?
There are several reasons why auto insurance costs are higher for an expensive vehicle. Luxury cars have more expensive parts, such as high-tech and advanced safety features. Also, if your vehicle is severely damaged and declared totaled, your insurance provider will need to cover the value of your car.
View New Car Loan Rates With Credit.com
Now that you know why your car insurance is so high, it’s time to take steps to reduce your premiums. Credit.com can provide you with a free credit score and credit report so you can see where you need to start working on your credit and lowering your premium rates.
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