The Importance of Credit

As a young adult making your first forays into the financial world, credit may not seem like a big deal – expenses are usually fairly easy to cover because you don’t have kids to look after or a mortgage to worry about. And, unless you are in need of credit, your credit rating may not seem like something that is all that important. It does, however, pay to take steps now to start building a good credit history so that when you actually do need to access credit, you can do so more easily and less expensively.

Having a good credit rating can save you thousands of dollars in interest and insurance premiums over your lifetime and can even give you a bit of an advantage when it comes to that management position that you have had your eye on.

It might seem paradoxical but having no credit history at all can out you in a similar category to people with poor credit for the simple reason that you will be an unknown entity to your potential creditors – you will have no means of proving that you are able to handle credit responsibly and so will be seen as a higher credit risk overall.

Having No History Can Be Damaging As Well

It might seem paradoxical but having no credit history at all can out you in a similar category to people with poor credit for the simple reason that you will be an unknown entity to your potential creditors – you will have no means of proving that you are able to handle credit responsibly and so will be seen as a higher credit risk overall.

What Credit Reports Are

Your credit report can actually be compared to a school report card, with the “exams” being your credit accounts and the score showing how well you have managed these accounts. The payment history gives a breakdown of whether or not you have paid your accounts on time every month and whether or not any payments are still outstanding. Paying late or not paying the full installment will negatively impact your credit rating.

The credit report shows a lot more than that though. It also shows what balance you owe your creditors and what your credit limits are. The total potential credit exposure, as well as the percentage of your credit utilization will also impact your score. Maxing out your credit limits affects your score negatively.

When a potential creditor looks at your report, they will assess whether or not you are a responsible borrower – if they have none of the above information to work on, they will have nothing to base their decision on.

Building Your Credit Rating

If you want to start building a credit rating, you need to make use of some sort of credit facility. That is not to say that you should rush out and get a bunch of credit cards but rather that you should start by opening one or two credit accounts so that you can show that you are a responsible lender. Store cards are usually easier to get than credit cards so start there. You will probably be given a small limit at first but this will be increased later as you prove that you can handle the account.

With this credit facility, it is important to make all payments on time and to make sure that you pay the minimum monthly instalment at the very least. Aim to use no more than 30% of the credit limit as this will help to boost your credit score. Many department stores will treat a 6 month account as cash so you shouldn’t have to worry about paying interest at this stage in time.

As time goes by, look at diversifying your credit report by applying for a small instalment loan, a credit card or vehicle finance. For creditors to get an overall picture of you as a debtor, having different types of financing on your credit report is important – it shows them how you would handle each type.

It is quite important to start building your credit report early on – older accounts count for more when it comes to establishing credit worthiness as they paint a fuller picture than newer ones.

The key to building a good credit rating is to be consistent – live within your means and never borrow more than you can afford to repay. Make paying your monthly bills on time your number one priority and you will build an excellent credit rating.

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