How can I use a credit card responsibly?

Dear Iona,

I graduated last year and was lucky enough to get a placement at a law firm. I am earning and saving into a LISA, with a view to building up a first home deposit, and now I'm thinking of taking out my first credit card as I've heard this is a good way to build up your credit score. However, I'm a bit terrified that I'll lose control of my spending and end up in debt. Do I need to take out a credit card? And if so, how can I manage it responsibly?
Robin
Birmingham

Dear Robin,

You’re right to be thinking about your credit score, even at this early stage.

First-time buyers need to demonstrate to mortgage lenders that they’re reliable borrowers, but that’s difficult if you’ve never had a borrowing history. Many young people (rightly) think that getting into debt unnecessarily is a bad idea, but there is no getting around our credit rating system, which acts as the gatekeeper to so many vital financial products, and how much lenders depend on it. There continues to be a very narrow focus on your borrowing history and arguably quite strange, outdated indicators of how ‘settled’ you are. 

Covid-19 has led to a significant spike in rejected young borrowers. According to Aldermore Bank’s first-time buyer index, just one in five first-time buyers were able to get a mortgage on the first attempt. This is down on last year, when around half of borrowers said they been approved first time. 

A lot of these problems can be avoided nearer the time when you apply for a mortgage by understanding how the lenders work. For instance, your lender will only lend you a certain multiple of your income. Using a trustworthy broker can often help you avoid the pitfalls and tick the right boxes.

Paying all your bills on time, getting on the electoral register and monitoring your credit score on a fairly regular basis to make sure it doesn’t have any errors are all easy wins

But ahead of that point, there’s a huge amount you can do to bolster your credit score. Firstly, nail the basics. Paying all your bills on time, getting on the electoral register and monitoring your credit score on a fairly regular basis to make sure it doesn’t have any errors are all easy wins. Also, don’t have multiple credit accounts open, as this can drag your score down – keep your borrowing to one or two current credit cards, max. If you move from one to another, make sure you close the previous one. 

Also, if you have an overdraft, prioritise paying that off as soon as possible. This is especially important if you’ve have a free student overdraft – you may now have a graduate account that continues to offer an interest-free overdraft, but this will be reduced over the next year or two before being converted into a very pricey standard overdraft (typical rates are 40%). Make sure you have a replayment plan so you whittle down the overdraft before the charges kick in. This alone will do wonders for your credit score.

Make sure you have an overdraft replayment plan so you whittle down the overdraft before the charges kick in.

Otherwise, stick to a low balance on your credit card – no more than 10% of your overall credit limit  – and ideally, pay off the balance in full every month for extra brownie points.

Never spend money on your credit card that you’re not absolutely certain you can pay back in full, so keep budgeting like a boss to avoid losing track of your spending. 

It’s tempting to treat your credit card like a debit card, only one where the balance never seems to shrink! But this is a surefire recipe for overspending, overborrowing and basically becoming a financial hot mess. One idea is to only use your credit card for certain types of ‘basic’ purchase you’ve budgeted for – i.e. groceries. Also, continue saving into a short-term funds beyond your emergency pot so that you don’t get in the habit of putting ‘fun’ stuff on the credit card. Having savings goals makes your spending more intentional – and you’ll enjoy the treat even more, knowing you’ve already paid for it.

Remember, credit ain’t free money: the bill will come, so make sure you’re ready for it. If you follow these guidelines, you’ll be hustling your way to a better credit score in no time!

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