What you need to know about credit cards when you are a young person
Credit scores and credit histories can be a grey area when you’re starting out…
Although you may not think your credit score matters right now, it will be important for things like getting good interest rates, mortgages or even renting, and it needs building up over time.
So, even though I won’t be moving out any time soon (sorry mum!), I’m trying to improve my credit score now. I’d heard that using a credit card might be able to help me do this, so thought I’d investigate further.
I’m not going to lie, applying for a credit card was confusing and a bit overwhelming – there’s so much information out there. But I powered through, brushed up and, at just 19, I am the proud owner of a credit card.
Here are some fundamental things I needed to know:
What a credit score is
Your credit score can be used to decide whether to lend you money, how much to lend you and at what interest rate. You can find out what your credit score is easily for free or for a small fee.
Different lenders calculate your score differently, so if you are turned down by one, another might accept you. It’s tempting to apply for as many as possible but too many applications can negatively impact your credit score.
How to build up a good credit score
The more payments you make on time, the more your credit score might improve. Paying household bills contributes to your credit rating, but if like me, you’re not doing that yet, there are other things that can help, such as:
- registering on the electoral roll
- managing a mobile phone contract
- regularly paying off a credit card balance.
When you use a credit card, you are borrowing money, which you will later have to pay back. They have different interest rates, features and eligibility requirements, so it’s important to understand them before applying.
How much you can spend depends on what credit limit you’re offered. I was offered a small amount (£750) as it was my first credit card, but this is likely to increase as I build up a good credit history.
Watch out! Some providers can automatically increase your credit limit without asking you – something which you can reject.
Credit cards have interest rates, meaning that you can be charged interest on what you have borrowed if you don’t pay it back at the end of the month. Interest rates vary by card. Mine was high (19.5%) as I hadn’t built up a credit history yet.
Applying for a credit card
Credit card providers can offer lots of different features, but it’s important to apply for the one that’s best for you. I wanted to keep things simple, so I chose one of the cards my current bank offered. I researched to make sure I was eligible for the one I wanted before I applied, to avoid bringing my credit score down with multiple applications.
You will also want to check if the credit card has a monthly fee and whether you can choose a different card without one.
Managing a credit card
Simply having a credit card won’t help build up your credit score, but managing it well will. As I’m trying to build up a credit history, I find a good time to use it is when I don’t need to! In short, pay for things on your credit card that you can afford to pay off. I often use mine to buy petrol.
Credit cards can also provide payment protection under ‘section 75’ of the Consumer Credit Act or the voluntary chargeback scheme –useful to protect your purchases.
It’s a good idea to set up a monthly direct debit for a fixed amount, so you won’t be stung for making a late repayment. I’m aiming to pay mine off in full each month so I don’t build up any debt.
Finally, don’t let a credit card burn a hole in your pocket! I often leave mine at home when out shopping for non-essentials. Now that I’ve got my head around it, my credit card is a useful and empowering tool to have in my purse.
This article is provided by the Money Advice Service.