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20s are the perfect time to build credit history—Here’s how it shapes your future
Your 20s are crucial for building a strong credit foundation. By understanding credit, making timely payments, and monitoring your credit report, you can unlock opportunities and secure your financial future, influencing major milestones like home buying and education financing.
Your twenties is a pivotal time in life – a period of growth, exploration, and laying the groundwork for your future. Amidst the whirlwind of excitement and newfound independence, one often overlooked, yet profoundly significant aspect of adulthood is building your credit history.
Establishing a strong credit history in your twenties can have a lasting impact on your financial well-being, opening doors to numerous opportunities and helping you achieve your long-term goals.
Why is credit history important?
At its core, credit history is a measure of trustworthiness. Lenders, insurers, and other financial institutions check your credit history to gauge your reliability and financial responsibility. A strong credit score can lead to favourable interest rates on loans, better rental opportunities, lower insurance premiums, and even job prospects in certain industries.
Benefits of building credit history early
Access to better financial products: Building credit early gives you access to a wider range of financial products, such as credit cards with better rewards, lower interest rates on loans, and higher credit limits. This financial flexibility can be invaluable as you navigate major life events, such as buying a car, purchasing a home, or starting a business.
Lower interest rates: A strong credit score can save you thousands of rupees in interest payments over your lifetime. Lenders offer lower interest rates to individuals with consistently high credit scores because they are perceived as carrying lower risk of missing loan repayments. This means you can borrow money at a lower cost, whether it's for a mortgage, auto loan, or personal loan.
Insurance premiums: Insurance companies use credit scores to determine premiums for various insurance products that one avails (e.g. life, health, motor, home). A higher credit score can lead to higher coverage, easier onboarding journeys saving you time and hassle on essential insurance coverage.
Better job prospects: Some employers use credit scores with consent, to assess your financial discipline. A good credit score will position you as a favourable candidate in the eyes of the employer.
Steps to building credit history in your 20s
Open a credit card account: One of the most effective ways to start building credit history is by opening a credit card account. Choose a card with low or no annual fee and use it responsibly by making small purchases and paying off the balance in full, each month.
Become an authorised user: If you're new to credit, consider becoming an authorised user on a family member's credit card account. This allows you to benefit from their positive credit history while building your own credit profile.
Pay your loans and cards on time: Timely payments are one of the most critical factors in building a strong credit history. Set up reminders or automatic payments to ensure you never miss a due date. Consistently paying your bills on time demonstrates financial responsibility and boosts your credit score.
Monitor your credit report: Regularly review your credit report to ensure accuracy and identify any potential errors or fraudulent activity. As per RBI guidelines, you can obtain a free credit report from any credit bureau once a year.
Keep credit utilisation low: Credit utilisation, or the amount of credit you're using compared to your total credit limit, plays a significant role in your credit score. Aim to keep your credit utilisation low to maintain a healthy credit profile.
Build a positive credit mix: As you progress in life, having a diverse mix of credit accounts, such as credit cards, unsecured loans, and secured loans, can enhance your credit profile. However, it's essential to manage these accounts responsibly and avoid taking on more credit than you can handle.
Overcoming common credit-building challenges
Accessing credit in your twenties comes with its own set of challenges. Many young adults struggle with limited credit history, student loan debt, and financial missteps. However, these obstacles can be overcome with discipline, education, and a proactive approach to financial management.
The long-term impact of good credit history
Establishing a strong credit foundation in your twenties sets the stage for a financially secure future. As you progress through life, your credit history will continue to influence your ability to achieve significant milestones, such as buying a home, financing education, or starting a family. Additionally, good credit history can provide a safety net during unexpected financial challenges, allowing you to access funds when you need them most.
Conclusion
Your twenties are the perfect time to take control of your financial future and build a strong credit foundation. By understanding the importance of credit, taking proactive steps to build and maintain a positive credit history, and staying informed about your credit profile, you can unlock a world of opportunities and achieve your long-term financial goals.
Remember, the decisions you make today will shape your financial well-being for years to come. Invest in building your credit history now and reap the benefits for a lifetime.
Sachin Seth serves as the Chairman of CRIF High Mark and the Regional Managing Director for CRIF India & South Asia.
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