It’s never too early to learn about the importance of being careful with your money and establishing positive money habits.
Understanding what credit is and how to build up a positive credit history, is an important life skill for young people to have. The earlier you learn about this, the more likely you are to establish a good credit history. This can be truly valuable to you in the future.
What is credit?
Credit allows you to obtain goods or services before payment is made. This is based on a promise that you will pay the money later. However, a credit agreement is generally not free and is likely to come with minimum monthly payments, interest rates and other fees. In the long run, what you purchase on credit is very likely to cost you more than what you could have paid for it with cash on the day that you made the purchase.
Why do we borrow or purchase on credit?
Common sense tells us not to borrow more than we can afford to repay. Understanding the principals of budgeting makes this easier to do because, as budgeters, we’re more likely to put money aside for different purposes, rather than spending on opportunities as they come along.
When it comes to money, and especially when it comes to things like setting goals, it is important to have income.
Generally, people may prefer to save up to buy the things they want in life using their income. But sometimes, saving alone may not be enough. For example, someone might have an immediate goal they want to see come to life now rather than having to wait to build a savings stash to allow them to realise that goal, for example getting your first car.
This is where borrowing comes in to play.
People, companies and governments borrow money every day to allow them reach certain goals. When we borrow, we create a Credit History for ourselves.
What is Credit History?
Your Credit History is information about your loans and borrowings. It covers things like mortgages, credit cards, overdrafts, hire purchase agreements and personal contract plans in your name.
Your Credit History includes intricate details about each loan i.e. the amount of the loan, the outstanding amount left to pay and any missed payments. This information is listed in a Credit Report.
Credit Reports are available for lenders, such as banks and credit unions, to review and consult when they are considering new applications for loans. Credit History is used to calculate a credit score. Lenders use Credit Scores to decide if they will lend money to you and how likely you are to pay it back.
Building a good Credit History is important
When you apply for a loan or other type of credit, such as a credit card or an overdraft, the lender has to make a decision whether or not to lend to you.
The information on your Credit Report can be used to decide:
- Whether the institution should to lend to you
- How much they should allow you to borrow
- How much interest they should charge you
Your Creditworthiness
Under EU Law, lenders such as banks or credit unions, must assess your creditworthiness before agreeing to give you a loan. Creditworthiness means your ability to repay the loan. This assessment must be based on the information you provide as part of your loan application, and also on the information in your Credit Report.
Information in your Credit Report may mean that lenders could decide not to lend to you, even if you have the income to repay the loan. They could refuse your loan if they believe they might be taking a high risk in lending to you.
Employers and even landlords may look at your Credit History before deciding to hire or rent to you, so having a bad Credit Rating can affect many things such as :
- Getting a loan
- Getting a job
- Getting accommodation
Don’t wait till it’s too late. Start now!
If you are under 18, there isn’t too much that can be done to establish your Credit History as yet, because you cannot sign a contract on your own until you turn 18. But that doesn’t mean that you can’t prepare for the future and know the steps to take to establish good credit habits!
- Open a Current Account so that you can manage your money
- Create a budget template, learn how to set your budget and stick to it
- Open a Savings Account. Put a little by regularly. This demonstrates you have good savings habits
- Set yourself savings goals. Build up that Rainy Day Fund
- When you are over 18, do not apply for credit you can’t afford. Make sure you stress test your finances making sure you can handle the monthly repayments even if emergencies come up
- Always pay back your loans on time, and if you can, pay even more than the minimum payment due
- Stay within your spending and credit limit
- Check your statements to look for overspending and make a plan to reverse those bad spending habits
