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Why Building a Credit Rating is Important for Young People

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Credit can seem like a strange and confusing thing when you are first of an age to be able to apply for it in your own name. When you turn 18, there are what seem to be a huge range of credit products available to you, from loans and credit cards to mortgages and car finance. However, actually getting approved for these things is another matter, because all of them require you to pass a credit check. When you have no credit history because you are young, you will always fail the checks for any products not specifically aimed at people with no credit background or a poor credit history, so those options you see advertised are actually outside of your reach.

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My Parents Have Good Credit – Does That Help?

One question a lot of people ask when they first start applying for credit is whether their parents’ credit history has any impact on their own. The short answer is no. When you apply for any form of credit in your own name only your own credit history is taken into account (which can also be a good thing if someone in your family has a history of something like bankruptcy – it won’t have any effect on your own record). However, if your parents have good credit you can apply for loans and credit cards on their own accounts, or have loans that they guarantee for you. Remember, though, that if you use a credit card in your parents’ names it will not help you with building your own credit history.

What Can I Do to Build My Own Credit Record?

It may sound odd, but the only way to get a good credit score is to get in debt. You may think banks would prefer to lend to people with no history of debt, but actually people with no debt history have had no opportunity to prove they can repay money reliably, which is what lenders want to know that you will do.

Of course, that doesn’t mean you need to get into a dangerous amount of debt just to ensure your future credit checks will give you the right result. What you can borrow with a non existent credit history will be at a high rate of interest anyway, so you don’t want to do this. Instead, get a credit card and use it for stuff you would normally buy with cash or on a debit card – stuff you do already have the money for. Then repay your card each month before interest is applied. You’ll show the bank you repay reliably without spending any money you don’t have or meeting fees.

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How Long Does It Take?

Building good credit can take a while, but is worth it. Within months you should find your card provider offering you better rates and higher limits, though it may be a few years before your saintly credit rating will get you the best mortgage deals.

If you want more advice about managing your money, check out financial advice sites like Money Looms and learn about how to handle credit effectively.

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