We look at the benefits of taking out a credit card in your twenties.
In the current uncertain economic climate, with lenders continuing to be very selective about who they lend to, those without any credit history can find it very difficult to borrow.
This applies to any form of credit, including credit cards, unsecured loans and mortgages, and is particularly problematic for young adults.
Lack of track record
The issue for lenders is that they want to see that a borrower is able and willing to make required monthly payments, and that he or she has a demonstrable track record of doing so.
“Lenders are still very strict as they seek quality in new business, rather than simply chasing quantity,” says David Black from financial analyst Defaqto. “They want to see that the repayment schedule is affordable for the recipient, and that there is no element of indebtedness.”
Build your credit profile
While these strict lending rules can be very frustrating for young adults who don’t have a track record, there are steps you can take to build your credit score.
The key is to demonstrate that you are capable of handling credit, and one of the best ways of showing this is by having a credit card to build data showing you’re a responsible borrower.
Cards for younger users
As a younger user, your first card will typically have a fairly low credit limit and a higher than average rate of interest, although if you use it responsibly, you may to able request an increase in the limit a little further down the line.
You also need to bear in mind that your choice of card will be severely restricted.
“For those without any credit history, there are a small number of cards potentially available,” says Black. “For example, the Barclaycard Initial credit card has a representative annual percentage rate (APR) of 29.9 per cent, while the Granite credit card has a rate of 34.9 per cent. Elsewhere, the Aqua credit card has a rate of 35.9 per cent, and the Vanquis Visa card has a rate of 39.9 per cent.”
Use your card wisely
If you’ve never had a credit card before, you may see these pieces of plastic in a very negative light and view them as a fast-track to debt, but this doesn’t have to be the case.
While it’s very easy to rack up considerable debts which could take you years to clear, this can easily be avoided with a little discipline.
The golden rule is to borrow a small amount of money regularly, stay within your credit limit, and pay off the bill each month – and on time.
One of the best ways to do this is by setting up a direct debit to repay the full amount every month so you’re never charged any interest; if you only repay the minimum, it will take you a very long time to repay the debt.
“If you’re late with a repayment, or if a repayment isn’t honoured – or exceeds your credit limit – you will typically incur a fee of £12,” warns Black. “Making sufficient repayments on time will help you establish a track record as a responsible borrower.”
Tips when applying
When applying for a credit card, you may find that you get rejected, but if this happens, you must avoid the temptation to apply for lots of different cards, as this will damage your credit rating.
Instead, you should look to improve your credit score in other ways, such as registering on the electoral roll, trying to avoid moving house too frequently, and paying off any credit you are able to get, such as a small overdraft or mobile phone bill.
Following the advice here to create a decent “behavioural profile” will not only help you get a more competitive credit card next time around, but will also help you with any other credit applications in the future – enabling you to get a mortgage one day.
