Advantages of Building Credit When You Are Young

When I was young, having a good credit score did not seem all that important. I had a job, cash in the bank and no real need for credit.  But in today’s 21st century world with its internet-based economy and fast-pace, life is driven by access to diverse types of credit.  Having a solid credit score is important to success, and the best time to start working on ensuring a good credit score is when you are young.  

Good credit is needed when someone applies for a credit card, gains approval from a cell phone vendor for that shiny new iPhone, or even when asking the bank to grant overdraft protection on an account.  A good credit score is even more essential for big ticket items like car financing, a new mortgage for a condominium or house purchase and (in some cases) to qualify for affordable insurance or a new job (most insurers and prospective employers now check your credit score as part of the selection process). 

Unfortunately, it often takes years to build a high credit rating.  Many aspects of your life depend on your credit history and having a strong history can make it much easier to get loans and to pay favourable interest rates.  When a lender attempts to decide to offer someone a loan, the lender investigates 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. That person is also more likely to receive a lower interest rate on the loan. 

You see, it is all about the risk to the lender.  Someone with a good credit history is considered less risky and will be given better loan terms. Getting a lower interest rate on any sort of loan (including lines of credit, car financing and mortgages) is incredibly helpful since a lower rate of interest allows you to repay the loan back faster and pay less interest over the life of the loan. This can elevate you to a stronger financial position.

So, a good credit history can be a powerful tool when you are young.  If you establish good credit early on, you will be able to buy a car or a house at a younger age and pay less interest than many of your peers.  But how does a young person start to obtain credit?

Someone with no borrowing history that 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 higher, amount of credit.  And most secured cards work in the same way as a non-secured card.  Over time, if you show that you can pay your bills on time, you can build a good credit rating and the card would be converted into a standard credit card. 

Please be aware these secured credit cards are quite different from what is known as a prepaid card. A prepaid card is a pre-loaded gift card that looks exactly like a credit card but can only be used when funds are transferred onto it.   These cards do not report to the credit bureaus, so they are not helpful in respect to building a good credit history. They are for convenience only.  

One alternative form of credit you might consider is a branded, or department store, credit card.  Typically having a much higher rate of interest then a bank credit card, these cards can be used both for purchases in that store or used anywhere else.  Despite a higher interest rate, they can help you build a solid credit history if used sparingly and may be a good first step if you have difficulty obtaining a regular credit card.  Just ensure you do not keep a balance on the card, or you will pay upwards of 30% interest per month.  

Another terrific way to ensure your credit rating grows over time is to avoid taking on too much credit card debt from multiple lenders.  Having one, or at the very most, two credit cards is advisable.  Anything more and you might be inclined to overspend, which could harm your credit rating. Aim to sign up for credit cards with a lower interest rate and low (or no) annual fees.

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