Imagine you have just finished school and are ready to start your life as an adult.
How do you apply for a mortgage, get a loan to buy a car or lease your first apartment? If you have always relied on your parents to make all your financial decisions, then it can be difficult to know where to start.
It is important to know your credit score and have a basic understanding of all your credit obligations. The most convenient way to find out your credit score is to view your credit report for free online.
What is a credit score?
Your credit report is a list of all your financial information and history. This report includes any debt or account that you may have. Each person is then given a score depending on how good they are at managing their finances. If you default on a payment or pay an account late, this will affect your credit score and cause it to go down.
Why is your credit score important?
Your credit score is something that will stay with you for life. Anytime that you try to apply for a loan or open a new store account your credit score will be checked. If you have a good credit score and always pay your bills on time, then your credit score will be good and you can qualify for a lower interest rate or other special offers. If you’ve never had any accounts or, if you’ve never applied for a loan, you might find it difficult to obtain credit.
The main point of a credit score is to let creditors know how risky it would be to lend you money. Having no credit can prove problematic. So, what do you do if you have no credit history at all?
Building up your credit score with a credit card
Credit cards are magical little cards that allow you to borrow money or buy something with the promise to pay for it later. It is simple to apply for a credit card and, even if you have no previous credit commitments, your application will be approved. A credit card is the easiest way to build up your credit score quickly. As with most things in life, moderation is key. If you don’t use your credit card responsibly then you could end up defaulting on your repayments. That will decrease your credit score and make it even more difficult to apply for loans in the future.
When you apply for your first credit card you will be given a low spending limit. Use your credit card to pay for small purchases. Make sure that you have enough money to pay for these items. Keep the cash aside and at the end of the month when your credit card bill comes pay off the entire bill in full. If you are able to make a larger payment than what is due you can make this extra payment. This will help raise your credit score very quickly.
As your credit score gets higher you can apply to have the limit on your credit card increased. If you continue to pay off more than you are supposed to, your credit score will soon be excellent.
Get a loan with a guarantor or apply for a joint account
If you prefer not to apply for a credit card, you can establish credit by asking someone who has a good credit score to co-sign on a loan with you. You could open a joint account with them and you be added as a joint user. This information will be listed on your credit report. Handel your payments correctly and you will quickly establish a credit record and a good credit score.
Types of credit to consider
There are four main types of consumer credit that you can apply for, understanding each type will help you determine which type would suit your needs the best.
Revolving credit
This type of credit is known as open-ended credit as there is no set date on which the credit agreement ends. As long as you pay off a portion of the amount that you owe - you can carry the balance forward until the next month and even borrow more. This type of credit has a set maximum limit, but as you repay the loan, the funds will once again be available to you.
Charge cards
These cards are very similar to credit cards as you can purchase things on credit with them. The only difference is unlike credit cards the entire balance that you owe, needs to be repaid by the end of the month.
Service credit
This type of credit is used for monthly services. The provider will perform the service agreed upon and you will pay them at the end of the month. A good example of this is your mobile service provider or your landlord that you pay your rent to each month.
Instalment credit or loans?
A personal loan allows you to borrow a specific amount. This amount needs to be repaid with interest in instalments each month. You will be charged interest for the duration of the loan agreement.
There are many ways to build up a credit score or improve your credit score. If you have a bad credit score you can still apply for bad credit loans but probably shouldn’t if you’re trying to get out of debt. Know your credit score, request your credit report often and make good financial decisions.
