Money management is an important lesson that young adults must have learnt by the time they start borrowing money and applying for credit cards. It is quite complicated to imbibe financial knowledge about interest rates, annual percentage rates (APRs), and how credit scores work. However, this is not enough when it comes to being in control of your finances.
Things that young adults must know about borrowing
First off, you should understand the importance of budgeting. Most adults do not realise the importance of having a functional budget. Its role is not limited to tracking your expenses, but it also helps you know whether you can afford payments. Apart from this, you should know the following things to ensure that borrowing will not tie you to an ongoing cycle of debt.
The importance of a credit score
Your credit score plays a crucial role for lenders to determine your credibility. A decent credit score will help you qualify for competitive interest rates. Three credit reference agencies maintain your credit information. A credit report consists of information like:
- Payment history
- The number of debts you owe
- Missed payments
- Credit utilisation ratio
Your credit file speaks volumes about your financial comportment. In order to earn good credit points, you must try to discharge your obligations on time, keep your debts limited, and keep the credit utilisation ratio lower than 30%.
Your credit score is not the be-all and end-all
Your credit score is an acknowledgement of your financial behaviour, but a lending decision is not solely reliant on that. Lenders will also look into your income sources to check whether you have enough income to keep up with payments.
Further, the score your credit report reveals is actually meant for you, not for lenders. They employ their own criteria to calculate your credit score. You should try to keep all aspects of your credit report in good condition because otherwise your score might be described as poor.
Make sure that you work on your overall financial condition, not just your credit rating. For instance, if you pay off your credit card balances in full every month, you might not have to worry about your credit score, but a high credit utilisation ratio might be a red flag.
The cost of borrowing
The cost of borrowing depends on your overall credit profile. People generally focus on interest rates, but the real cost of a loan is determined by the APR. It includes interest rates, associated charges and fees. It may vary by lender, and therefore, it is vital that you carefully research it.
The cost of borrowing is also subject to your credit rating. For instance, if you are looking to apply for a bad credit loan in the UK with no deposit, interest rates will certainly be high. You may be able to qualify for slightly lower rates if you have a decent credit history.
Types of debts and their impacts
There are various types of debts. Some are short-term debts that are repaid in one go, while some are instalment loans that are repaid over an extended period of time. At the time of borrowing, you must know which debt is useful for you.
For instance, if you need money to pay for unexpected expenses such as a car repair, small emergency loans will be suitable for you. They are known by various names such as payday loans, same-day loans, and instant loans.
However, if you need money for a wedding, vacation or home refurbishment, you will need to apply for personal loans, also called unsecured loans. Small emergency loans are also a part of personal loans as they are not backed by collateral, but wedding loans and home improvement loans, unlike small emergency loans, are repaid over a lengthy repayment term, which starts from six months.
At the same time, you must know their implications on your overall financial condition. For instance, if you take out too many payday loans, your money management ability will come into question. Further, short-term loans do not help with improving your credit score. Personal loans, on the other hand, help with ameliorating your credit rating.
Eligibility
You should also know the eligibility for each loan. The basic criteria will remain the same for all types of loans, but there are a few conditions which vary from loan to loan.
For instance, unsecured loans do not require you to pay money upfront, but mortgages and car loans require you to make a deposit. Credit score requirements will also be different for large secured loans than for personal loans.
The final word
As you know, at some point in life, you will need to borrow money. It is essential that you expand the horizon of your financial knowledge. Make sure that you learn how to budget and make the most of it to avoid indebtedness down the line. If you start imbibing money concepts now, you will be able to be in control of your finances.
Also read how to improve your chances of approval for no guarantor loans.
