As young adults step into the realm of financial independence, one crucial aspect that often goes unnoticed is building a solid credit history. Establishing good credit is vital for future financial endeavours, credit score, and access to various credit products like loans and credit cards. Starting early can provide young individuals with a head start and set them up for financial success in the long run. In this article, we will explore the importance of building credit from a young age and highlight essential tips to achieve this financial milestone.
Why is building credit important?
A good credit score is a numerical representation of an individual's creditworthiness. Lenders, such as banks and financial institutions, use this score to assess the risk of lending money to an individual. A higher credit score indicates responsible credit behaviour and a lower credit risk, making it easier to secure loans or credit cards with favourable terms and interest rates.
Young adults may not immediately require credit, but sooner or later, they will likely need it to finance significant milestones such as purchasing a car, renting an apartment, or even buying their first home. Without a solid credit history, obtaining these essential assets can be challenging and sometimes impossible.
The importance of starting early
Building credit takes time, and the length of an individual's credit history plays a significant role in credit score calculations. The sooner young adults begin their credit journey, the more substantial, and reliable their credit history will be when they need it most.
One of the essential factors in determining credit scores is the length of credit history, accounting for about 15% of the overall score. By starting early, young adults can gradually build a long and positive credit history, which can significantly impact their creditworthiness in the future.
Tips for young adults to build credit
Opening a secured credit card: For those new to credit, a secured credit card is an excellent option. It requires a cash deposit as collateral, which becomes the credit limit. Responsible use and timely payments can help establish a positive credit history.
Credit-builder oans: Credit-builder loans are designed specifically to help individuals build or improve their credit. Unlike traditional loans where the borrower receives the loan amount upfront, with credit-builder loans, the borrowed amount is held in a locked account, and the borrower makes fixed monthly payments. Once the loan is fully paid off, the borrower receives the total amount along with an improved credit score.
Paying dues on time: Consistently paying bills by their due dates reflects responsible financial behaviour and positively impacts credit scores.
Limiting credit applications: Multiple credit applications within a short period can be seen as a red flag. Young adults should be cautious about applying for numerous credit cards or loans simultaneously.
Becoming an authorised user: Being added as an authorised user on a parent's or guardian's credit card can help establish credit. However, it is essential to ensure that the primary cardholder has a good credit history.
Keeping credit utilisation low: Young adults should aim to use only a small portion of their available credit to maintain a healthy credit utilisation ratio, ideally below 30%.
Building credit from a young age is a critical step toward achieving financial goals later in life. A strong credit score opens doors to various financial opportunities, from securing a mortgage to obtaining favourable interest rates on loans. Starting early and establishing a positive credit history can make all the difference when the time comes to make significant financial decisions.
As young adults embark on their journey to build credit, they can benefit from resources like the Bajaj Finserv Credit Pass, which offers real-time insight into your credit health and monthly CIBIL Score checks, along with a host of tools to improve your credit status. By following responsible credit practices and staying informed, young individuals can pave the way for a brighter financial future.
So, for all the young adults out there, the message is clear: start building credit now, and your future self will thank you for it!
