Getting on the credit train can be a Catch-22 situation for many young people. To be given credit, you need to have established a good credit history. But how can you do that when financial institutions won’t give you a go?
There was a time not too long ago when borrowers had to put on their best clothes and make an appointment with their bank manager, who was only available at limited times, and usually made them jump through hoops before they would agree to lend any money.
Back then, for young borrowers – even for smaller items such as cars – there was a common practice of the guarantor. Usually Mum or Dad guaranteed the personal loan in order for their child to buy their first car.
This practice has slipped out of fashion in recent years, but as Aussie founder and executive chairman John Symond says, personal loans are the perfect way for younger people to be able to borrow credit, and subsequently when they’ve established a good payment history, they then have a good credit rating.
He says the advantage of a personal loan is that you pay the debt back over a set period of time. With credit cards, borrowers rarely repay the principal, which means you are basically paying a high interest rate without reducing the loan.
“When I was a kid, this was the way most people got started,” he said. “You usually saved a decent deposit, which showed your Mum and Dad you could save and then they were more likely to go guarantor for you.”
“By the time you’ve paid the personal loan off, the lender can see you’ve done a good job, made your payments on time and then they may be more likely to give you a credit card, or lend you money for a property down the track.”
Mr Symond said it’s important for young people to learn the value of saving and to respect credit by learning how to pay off debts on time.
“We need to teach financial literacy skills in our schools to ensure young people know how to manage their money,” he said.
Figures from credit reporting agency Veda Advantage support the idea of instilling sensible financial habits from an early age. In research conducted in 2007, Veda found Generation Y is responsible for more than one-third (37 per cent) of Australia’s total consumer credit defaults, despite only making up 20 per cent of the entire credit active population.
Veda Advantage suggests the following tips for young Australians to keep their credit history clean:
- Pay your bills on time, or carefully consider your credit commitments.
- If you are having trouble paying, contact the organisation you owe money to, as many organisations are willing to set up a reasonable payment extension system if you talk to them about your situation. It is often the failure to respond to a bill or notify a business of your intention to pay that causes them to proceed to default stage.
- Don’t take submitting credit applications lightly – “shopping around” for credit can reflect badly on your credit history because it can indicate to a financial institution that you are potentially being rejected in your other credit applications. Current legislation in place means organisations running credit checks on you can’t see whether or not an application was successful – all they can see are the number of applications.
- If you think you may have problems paying a mobile phone bill, think about pre-paid services.
- It’s important to keep your address and other details accurate and up to date: If you have moved and haven’t notified one of your credit providers about that then they may be sending your notices to the wrong address. It’s your responsibility to provide those details to financial institutions and suppliers etc.
- Check your file – if you think something may be inaccurate, let Veda know and they can help you sort it out. You can check your credit file and set up credit alerts by visiting www.mycreditfile.com.au
- Consider a credit alert system – so you are made aware of any changes to your file. That allows you to save valuable time sorting out anything that might be problematic such as a fraudulent use of your identity.