Understanding the importance of money and credit is something that should begin early so that youngsters can establish healthy credit habits. This is essential as some credit history is a prerequisite for having a credit score.
In turn, this allows youngsters to transition into adulthood more smoothly because they can access loans, insurance and other financial products at relatively reasonable rates compared to those without a credit history.
A Few Pointers
Youngsters can establish their credit history in various ways. One of the best is to opt for a credit card on turning 18. To acquire a solo credit card, However, in India, it is still very difficult for a college student to obtain a credit card from a bank. The best bet for a student is to apply for a credit card or credit line product with a digital lender, who might be more willing to approve them.
Minors can also have credit cards if a card-holding parent authorizes a supplementary card in their name. While these add-on cards share almost all the features of the primary one, the spending limit can be capped at a lower amount, if required. A supplementary card can help teenagers understand the importance of calibrated spending.
It is also essential to teach youngsters how to maintain an excellent credit history. This can be done by spending within one’s means, always paying credit card bills on time and avoiding multiple credit cards or bank accounts that are then difficult to manage.
Another crucial element is teaching teens the difference between credit and debit cards. Whenever a parent swipes a card, children observe the process intently. These years are the right time to teach them that even though a debit card is akin to cash in hand, a credit card is borrowed money. As a result, years before youngsters begin using their debit or credit card, they know the difference between the two.
Such early lessons will help them manage more complex issues related to borrowing and healthy credit card usage, all of which contribute towards building their credit history. In today’s era of consumerism, good credit scores have many benefits for youngsters. For instance, these will be key in ascertaining their applications for credit cards and educational, personal, consumer or home loans are approved easily, on more favourable terms.
In later years, when they seek big-ticket loans from traditional lenders or fintech players, they will be assured of approvals on better terms, depending on the duration and status of their credit history.
Other Key Elements
Meanwhile, it’s necessary youngsters don’t harbour any misconceptions about credit that could prove costly in monetary and credit score terms. Accordingly, they should realise that even a single late payment on card bills or loan repayments can impact credit scores negatively. To avoid any missed payments, one could opt for automatic payments or ECS debits. These are particularly beneficial for monthly or periodic payments. Of course, these options only work if there are adequate funds in their bank account to pay bills on time.
The youth should also know that defaults on other bills – phones, utility, medical and others – can hurt their credit score is reported to credit bureaus. As a result, it is imperative to maintain fiscal discipline in paying all bills on time. Likewise, if they close or discontinue some service or utility, any pending balance should always be cleared. If not, the discontinued service provider could send this information to the credit bureau.
Similarly, the youth should either cap spending limits or ensure they restrict their credit card usage to the extent that they can clear the balance every month. Carrying forward any balance results in high-interest charges. Additionally, a high balance outstanding may affect the credit score. A simple trick is to use their credit card like a debit card, only making purchases they can pay off comfortably. It’s best to keep the utilisation ratio at 30 per cent or lower, so it’s easier to clear the bills on time each month.
The other aspect is to avoid making multiple back-to-back loan applications. Each time a person applies for a new loan or credit card, the lender puts in a request to CIBIL for the credit score, termed a “hard inquiry”. Numerous hard inquiries within a short span make lenders wary of approving a loan or card since the applicant appears credit hungry.
Therefore, the youth should only apply for a credit card or loan to one lender or bank at a time, where the eligibility criteria are easier for them to meet. Lifelong fiscal discipline leading to a robust credit score will then pay both short-term and long-term dividends.
By Gaurav Jalan, CEO and Founder – mPokket