Why A Good Credit Rating Is Essential From A Young Age.

 July 19, 2021

By  Chase Edwards

Establishing Good Credit from the start.

I’m sure a lot of you can relate when we say as a young person; you didn’t see the importance of having a good credit score.

There was no need for credit, I had a job, cash in the bank, and no credit card bills to pay.

In today’s world, credit is an essential aspect of determining a person’s future.  To help be successful you need to have a high credit score. The best way to help secure this is to start young!

Why is Credit So Important?

Credit is needed when you apply for a credit card, a mobile phone plan, or even when you ask the bank to help out with overdraft protection on an account.  A good credit score is even essential for big-ticket items and interest-free loans.

Unfortunately, it often takes years to build a high credit rating.  Many aspects of your life depend on your credit history. Having a strong credit history can make it much easier to get loans and pay favourable interest rates. When a lender attempts to make a decision to offer someone a loan, the lender looks into that person’s credit history.  Someone with a lengthy history of successful borrowing and repaying on time is more likely to receive a better loan rate.

You see, it’s all about the risk to the lender.  If you have a well-established credit history it’s not so risky.  Getting a lower interest rate on any sort of loan (including lines of credit, car financing and mortgage’s) is incredibly helpful. A lower rate of interest allows you to repay the loan faster and pay less interest over the life of the loan.  This can elevate you to a stronger financial position.

The Power of a Good Credit History, but How Do I Get One?

Good credit history can be a powerful tool when you’re young.  If you establish good credit history early on, you’ll be able to buy a house or a car and pay less interest than many of your peers who have not been so savy.  So how does a young person start to get credit?

For someone who has no borrowing history that they can prove their creditworthiness will find a secured card is often easier to obtain (and less risky for the lender) than standard credit cards. 

By putting down a small deposit as security to use the card the lender grants you access to a similar, or a higher amount of credit.  Most secured cards work in exactly the same way as non-secured cards work.

Over time, if you show that you can pay your bills on time, you can build a good credit rating. Opening, the world of lending to you.

Keep in mind that these types of cards are very different from what is known as prepaid cards.  A pre-paid card is actually that, it already got the finds on it. It looks just like a credit card but can only be used when funds are available on it. 

These cards don’t report to the credit bureaus, so they’re not helpful in respect to building a good credit history.  Another form of credit you might consider is branded or department store credit card.  Be aware that typically these cards will have a much higher interest rate than a bank credit card. 

What Can These Cards Be Used For?

These cards can be used for in-store purchases.  Despite having a higher interest rate, they can help you build a solid credit history. Used sparingly, they may be a good first step if you have difficulty obtaining regular credit, and maybe a good first step if you have difficulty obtaining a regular credit card.

Another great way to ensure your credit rating grows over time is to avoid taking on too many credit cards.   Having one, or at the very most, two credit cards are advisable. Anything more, and you might be tempted to overspend!  Aim to sign up for credit cards with a lower interest rate and low (or no) annual fees.

Why you should start building credit early.

Young people often have limited experience with credit and might not realise all the ways that good credit can make life easier. We believe that financial education is important for everyone. It is important to teach your teenager the importance of good financial practices.

Our number one piece of advice is to recognise the difference between wants and needs when making a purchase, as well as the reason behind it. “Do I need it, or do I want it”? It is something I am constantly instilling into my children, I will admit it’s sometimes a do as I say and not as I do scenario!!

So many teens are bombarded with ads encouraging them to make impulse buying decisions. Instead, teens should learn which purchases are beneficial and align with their goals, and to do so, they have to understand what is driving them to want to make that purchase. This helps to teach the value in the money they’re spending and avoid buyer’s remorse.

How to improve your credit score.

Here’s a handy image you can use, to talk to your family about keeping a great credit score once they are actively applying for finance.

Understanding this information will help them proactively protect their credit report in the future.

Remember that we will all make mistakes. Everybody does. However, you can make sure that the mistakes aren’t destructive, and you can learn from them. Whether you’re fresh out of school or retired, it’s never too late to put some of these habits into practice. 

Hopefully, you have found this information useful. Wishing you all the best with your financial futures! To speak to our team about a custom-tailored plan, contact us today!

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