Growing up I had no clue about credit rating, score or report. My first credit was a mobile phone contract I took with the then One 2 One network, now T-Mobile or shall I say EE. I was 16 I believe. I took the contract without my parents’ knowledge and for my first bill, I ran up a bill of £300. £300, where was a 16 years old who was in college, working part-time in McDonalds and earning about £2.50 per hour going to get that money from to pay? Somehow I did manage to pay off that bill and yes you guessed it, my parents eventually did find out!
The point of sharing this is that from the age of 18 you can officially start applying for credit, at least in the UK. You can get a mobile phone contract independently of your parents, apply for credit cards, stores cards, bank loans etc and you can just keep applying for credit, on and on and off you go.
But before you turn 18, who really sits and talk to you about credit rating, credit report or credit score? Who actually tells you that if you take on credit and you don’t pay on time, you could end up with a little orange dot on your credit report that says missed payment. And if you missed payment thrice in a row, you can be defaulted, and a default stays on your account for 6 years. So for the next 6 years, credit is not going to be easy for you! At some point, you may get the pleasure of some credit companies offering you credit at ridiculously high APRs.
At 18, possibly we don’t learn any better and we run up a bill, miss payments, possibly get a default and by the time you are age 24, you are in the same place you were when you were 18 if not worse on your credit profile. If as an adult at 20 something, you are not learning any better, you can forget a whole lot of opportunities that your credit profile could hinder you from obtaining. For an example, getting a simple overdraft of £200 is difficult with your bank, applying for a credit card with low APR with your bank will be almost impossible, without even considering a car loan, a business loan or even a mortgage. Although I imagine in some cases, you may be favoured!
Here’s the crunch of the whole thing, if you are not caring about your credit report now, you are setting yourself up for a potential future financial hardship in obtaining credit for some things that may be the next push you need in your life!
Managing your credit is this simple, at least to me:
1. You need to have credit to be able to manage the credit. I know some people believe it’s best not to have any credit. No credit means bad credit because no lender can prove your credibility.
2. If you have credit, you need to use it because not using it does not prove anything.
3. Don’t spend on credit more than you have coming in or more than you can afford to pay back.
4. Make all credit accounts payment on time, at least make your minimum payment, eventhough paying only your minimum means you will be paying back more interest.
5. If you can’t pay on time or on a particular month, contact the lender and see what they can do for you, without it affecting your credit rating. You will be surprised to find that some of them are quite very understanding and helpful. Please do not think avoiding contact with them will solve the problem, it will only make it worse.
6. Make use of debt management agencies, who may be able to advise you on how to sort out your debt and manage your money better. There is nothing wrong with seeking help when you need it. One agency you might want to check out is StepChange.