Building credit history at a young age can be challenging, but not impossible. Follow these steps to build a good credit score.
Credit cards - these small plastic cards are magical. They are much more than a mode of payment. Credit cards and credit scores have the power to redefine your financial future. In the western countries, you need a credit card for everything. From renting a home, getting a mobile connection, paying for utilities, and even some hiring managers prefer to check your credit score and credit history before offering you a job.
One look at your credit history, and they have everything they need to know about how financially responsible you are. It also determines your monetary future. Therefore, establishing a strong credit history is an essential part of adulting. But it is also challenging, especially for someone who has no credit.
So, here are some important steps to build a credit history every young adult should follow. But before that, let's understand the value of having a stellar credit history.
H2: Why does a good credit score matter, especially for young adults?
As we already mentioned, when you've your first credit card or got your first loan, you may think that since this is the first time you are applying for credit, you don't have any credit history. It may not be true.
- Beware of identity theft
According to a study by Carnegie Mellon in 2011, about 40,000 teens were victims of identity theft. Since most teens and their parents don't keep a tab on their underage children's credit scores, thieves take advantage of first-time credit card offers and loans without being suspected. So, once they actually get their credit cards, they realize they are already in trouble.
But let's assume everything is perfectly alright with your credit score and your credit history a blank slate; having no credit could cause you much trouble too. It is mainly because without any credit history, the lender is unaware of the fact whether you can repay your borrowed money in a timely manner or not. As a result, many lenders and credit card companies are reluctant to take a chance and offer you a loan or a credit card. Even if they do, they may charge you a higher interest rate than usual. But, there's more. Due to no credit:
- You may experience trouble in getting your loan application approved.
- You may have to pay higher utility deposits.
- You'd have fewer options to acquire money during any emergency.
- You may have a more challenging time qualifying for a credit card.
- You may have to pay a higher down payment while purchasing a house.
- Your visa application may get rejected.
- You may not be able to rent an apartment when you move to a foreign country.
These are some of the reasons why young adults should start building credit history at a very early age.
Follow these easy steps to build credit score
If you are dependent on your parents financially, many parents prefer to give you a credit card. You might have even seen this in movies - teenage kids having credit cards. Have you ever wondered how they got the card despite being underage? Here are some ways to get a head start on early creating a strong credit history.
1. Get authorised credit cards
Many kids these days begin their credit journey with the help of their parents - specifically their credit history. When your parents have a good credit history and credit score, you can easily apply for an authorised credit card. This way, you can reap the benefits of their good credit history, on-time payments, and minimum credit utilisation ratio.
2. Get secured credit cards
Secured credit cards are great ways to begin your credit-building journey. It comes quite handy when you are applying for a credit card on your own from scratch or when you have a bad credit score. As the name suggests, these credit cards require a security deposit. So, if you cannot pay your dues for 90+ days or default on your repayment, the lender will deduct the sum from your security deposit.
3. Apply for college student credit cards
There are some credit card providers who offer specialized cards for college students. They are much easier to qualify for, even if you do not have any credit history. Having this card from your college days will give you ample time to establish a strong credit score. If you are nervous about overspending, start with baby steps – make a couple of purchases or use it only for paying your utility bills only. But, make sure to pay the dues back on time.
4. Sign up with a service that reports to credit bureaus
Today, you have many services that report back to the credit bureau. For instance, you can take a postpaid mobile connection, avail of buy now, pay later options, borrow money or salary loan from digital lending services, take a loan against your fixed deposit, etc. By making on-time payments through these services, you can easily build and protect your credit score from slipping.
5. Getting a co-signer
A co-signer is someone who takes responsibility for paying off your loan or credit card outstanding if you fail to make payments for 90+ days. Yes, it is risky for the co-signer as it could hurt their credit score. So, always make a co-signer who is very close to you. For instance, your parents can be your co-signer or your spouse.
6. Repay your debts on time
This is probably the essential rule for improving your credit score. Once you get a credit card or loan, make sure you don't miss your payment due date by even one day. This way, you can avoid sky-high paying late fees and high-interest rates.
If you are not good at remembering dates, set instructions for auto debiting the bill amount. Some companies and banks offer benefits to those who auto-debit their payments as it shows good financial behaviours. This way, not only will you save your hard-earned money, but your credit score will also improve drastically if you pay your bills on time.
However, check your credit card statement and ensure you are not being overcharged before making any payment. Check out this beginner's guide on avoiding credit card penalties.
7. Keep your credit utilisation ratio in check
When you apply for credit, you may become eligible for a large sum as a credit limit. It can be tempting to spend them all. But, try not to get overboard with the credit usage. Because remember, the lesser you use your credit balance, the better your credit utilisation ratio. And the lower this score is, the better is your credit score.
We hope these tricks help kickstart your credit score-building journey. But ultimately, it's up to you and your credit habits that will determine the success of your financial future. Start at an early age so that it gives you enough time to build a stellar credit score.