Good credit rating can mean better interest rates
Young people are being warned to protect their credit ratings fiercely if they want access to loans at better interest rates and on more favourable terms.
Lyn McMorran, chief executive of the Financial Services Federation, which represents non-bank lenders, said many young people did not realise how easy it was to get a black mark on their credit records.
It was not only missed loan payments that created problems, she said.
A phone, broadband or power bill could also be an issue. "You might be meant to share the power bill with three flatmates but if they take off and the bill is in your name, the debt collectors will only chase you, not anyone else."
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Who cares about bad credit?
McMorran said a bad credit rating could make future borrowing much more expensive.
"It increases the cost of credit because you are seen as a much higher risk."
Those who had a good rating or history could use it to negotiate better interest rates and terms on loans, she said.
"Most lenders have some room for flexibility on interest rates. They will always charge a premium for people who have a default history, because they are proven to be a higher risk."
Hazel Phillips, spokeswoman for credit rating site Credit SImple, said some utilities companies would demand a security deposit upfront if people applied for an account without a credit history, or with a black mark.
"It's usually the bad stuff that counts against you rather than not having any record at all. If you've got naughty items on your credit history ... you could end up being declined for credit altogether. Having a credit history is actually a good thing for consumers."
How can you get a good credit rating?
On one hand, we are told to avoid debt. On the other, we are told to build up a good credit history showing that we can pay it back.
McMorran said a simple way for young people to build up a good credit score was to have bills in their names and pay them on time.
The shift to comprehensive credit reporting means you are now more likely to get credit for good behaviour, Phillips said. "This 'positive' payment information means that if you're paying your bills responsibly and on time, it will show up on your credit history, and help your credit score."
Phillips said people should also avoid making lots of applications for credit. If you are shopping around for a good deal on a loan, do it without handing over your personal details.
"Multiple credit applications or too many debts in a short space of time can be a red flag for lenders. This suggests a borrower might not be reliable, and could be slightly desperate to secure debt in order to pay for something short-term – not a sign of a reliable credit user," she said.
"Ideally, a consumer shouldn't have more than three or four lines of credit at once, and shouldn't have a history of numerous applications, whether they've been rejected or approved.
"Only apply for credit you need. This includes telco products and power accounts as well as mortgages, credit cards and personal lending – those with the best credit scores usually only have a handful of applications in the past few years."
She said lenders would not just be concerned with the fact that there had been a credit application, but would look at what it might mean.
Applications for small loans under $2000 were often with payday lenders, she said, and other lenders might look at that and read it as a sign that a borrower was not a stable prospect.