Young people can build their credit history in a variety of ways. One of the best is to opt for a credit card at the age of 18.
Understanding the importance of money and credit needs to start early so young people can establish healthy credit habits. This is essential because certain credit history is a prerequisite for obtaining a credit score.
This, in turn, makes it easier for young people to transition into adulthood as they can access loans, insurance and other financial products at relatively reasonable rates compared to those without a home. credit history.
A few pointers
Young people can build their credit history in a variety of ways. One of the best is to opt for a credit card when you turn 18. To acquire a solo credit card, however, in India, it is still very difficult for a student to get a credit card from a bank. The best bet for a student is to apply for a credit card or line of credit product from a digital lender, who might be more willing to approve them.
Minors can also have credit cards if a parent holder authorizes an additional card in their name. Although these add-on cards share almost all the functionality of the main card, the spending limit can be capped at a lower amount, if needed. An additional card can help teenagers understand the importance of calibrated spending.
It is also essential to teach young people how to maintain an excellent credit history. This can be done by spending within your means, always paying credit card bills on time, and avoiding multiple credit cards or bank accounts that are then difficult to manage.
Another crucial element is teaching teens the difference between credit and debit cards. Each time a parent swipes a card, the children watch the process carefully. These years are a good time to teach them that while a debit card is like cash, a credit card is borrowed money. Therefore, years before young people start using their debit or credit card, they know the difference between the two.
These early lessons will help them navigate more complex issues related to borrowing and healthy credit card use, all of which contribute to building their credit history. In today’s age of consumerism, good credit scores have many benefits for young people. For example, these will be essential to ensure that their applications for credit cards and educational, personal, consumer or home loans are easily approved, on more favorable terms.
In subsequent years, when they apply for large loans from traditional lenders or fintech players, they will be assured of obtaining approvals on better terms, depending on the duration and status of their credit history.
Other key elements
Meanwhile, it is necessary that young people do not harbor any misconceptions about credit which could prove costly in terms of money and credit score. Therefore, they must realize that even a single late payment on card bills or loan repayments can have a negative impact on credit scores. To avoid any missed payments, you can opt for automatic payments or ECS debits. These are particularly advantageous for monthly or periodic payments. Of course, these options only work if there are enough funds in their bank account to pay the bills on time.
Young people should also be aware that defaulting on other bills – phones, utilities, medical bills and more – can hurt their credit score and are reported to the credit bureaus. Therefore, it is imperative to maintain fiscal discipline by paying all bills on time. Likewise, if they close or discontinue a service or utility, any pending balance should still be cleared. If not, the interrupted service provider could send this information to the credit bureau.
Likewise, young people should either cap spending limits or make sure they limit their credit card use to the extent that they can pay off the balance each month. Carrying forward any balance incurs high interest charges. Additionally, a high outstanding balance can affect credit score. A simple trick is to use their credit card like a debit card, only making purchases they can comfortably pay for. It’s best to keep the utilization rate at 30% or less, so it’s easier to pay bills on time each month.
The other aspect is to avoid making several consecutive loan applications. Each time a person applies for a new loan or a new credit card, the lender submits a request to CIBIL for the credit score, called a “serious inquiry”. Many difficult inquiries in a short period of time make lenders reluctant to approve a loan or card because the applicant appears to be craving credit.
Therefore, the young person should only apply for a credit card or loan from one lender or bank at a time, where the eligibility criteria are easier for them to meet. Lifelong fiscal discipline leading to a strong credit rating will then pay dividends in the short and long term.
By Gaurav Jalan, CEO and Founder – mPokket