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building credit early

Why You Should Build Credit When You’re Young

When you’re young, building your credit history may not seem important to you. At this age, you aren’t likely to need a lot of credit and you probably feel like you have a long future ahead of you to show how financially responsible you are. However, it’s important to start building your credit as soon as you can.

It often takes years to build a good credit rating. The earlier you start, the more prepared you will be when it comes time to get a car loan, buy a house, or make another big financial decision. Having good credit can even help you get an apartment application approved. 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 makes the decision as to whether to offer someone a loan, the lender looks into their credit history. Those who have a long history of successfully borrowing money and repaying it on time aren’t just more likely to receive a loan, but they’re also more likely to receive a lower interest rate. Lenders consider the risk of lending someone money when they offer a loan. Someone who has a good credit history is considered less risky and therefore this person will be given more favourable loan terms. Getting a lower interest rate on your loans can be incredibly helpful, as it will mean that you’ll be able to pay these loans back more quickly and you will spend less money to do so. This can put you in a stronger financial position.

Having a strong credit history when you’re young can help you for the rest of your life. If you establish good credit when you are young, you’ll be able to buy a car or a house earlier and pay less interest than many of your peers, setting yourself up to be in a strong financial position for many years.

How To Build Your Credit History

The only way to build up your credit score is to show that you can successfully borrow reasonable amounts of money and repay these loans as they become due. Over time, lenders will see that you can be responsible with borrowing and this will make them more comfortable with lending to you.

Young people can build up their credit history by:

  • Using a secured credit card
    • It can often be tough for a young person with no credit history to get a credit card. However, a secured credit card can help you build up your credit. This is a card where you put down a deposit as security for using the card. Typically, the credit limit is based on this deposit.
    • You can then use the card just like a regular credit card, by making purchases and paying your bill monthly.
    • Over time, if you show that you can pay your bills on time, you will build up a good credit rating.
    • Keep in mind that a secured credit card is different from a prepaid card. A prepaid card works more like a gift card. There are no monthly bills and, once you have spent the money on them, they’re empty. These cards do not help build your credit rating.
  • Use a store credit card
    • Many department stores, electronics stores, etc. offer their own cards that you can use to make purchases in their stores. These cards typically have much higher interest rates than traditional credit cards, but they can help you build your credit rating and may be a good option if you are unable to get a standard credit card.
    • With these cards, it’s important to maintain a low balance (due to the high interest rate) or to pay the balance off in full each month.

Many college students receive a lot of credit applications as credit card companies are looking to attract those who are getting their first credit cards. It’s important to be selective with accepting these offers. Having too much credit makes it much more likely that you will overspend, and it could also potentially harm your credit rating. Lenders often believe that if you have access to a lot of credit, you’ll be likely to use it, which could get you into financial trouble. Try to get only one or two cards, and look for ones that have lower interest rates and low (or no) annual fees.