Friday, 19 February 2016

Why do young adults fumble on credit?

Nitin got his first credit card at 23, and by the time he was 31, was struggling to repay rolled-over outstanding amounts not only on that card, but also on several others he had acquired since. To make matters worse, his recent application for a car loan was rejected because his CIBIL score was low. If this sounds like a situation that you or a loved one have been in, read on to know more about how you can take control of your finances and repair your credit health.
In your younger days, it is likely that you made some rather glaring financial mistakes. This is especially true for someone in their mid-20s, out of college and into their first jobs, where the sudden burst of financial freedom makes one spend rather lavishly, whether on friends, a vacation or maybe just an entirely new wardrobe. And before you know it, you have racked up a steep credit card bill and are already facing mounting debts. So where do you go from here?
A recent survey conducted by the US-based Credit Karma says that about 68 percent of the consumers in the study had made at least one financial mistake before the age of 30. This was either in the form of huge credit card spends or having defaulted on a loan or got into debt. The long-term impact of this is significant; it indicates that at a later stage getting finance for important life goals such as purchasing a home or funding the education of a child may be difficult, owing to a resultant low credit score. With each passing year, costs only escalate, be it housing, transportation or education, and not being able to avail of personal finance when you really require it can seriously hamper your quality of life.
Correlation between debt and CIBIL score
Every time you avail of a loan or credit card, your credit history gets an update. This is maintained in the form of CIBIL report which are generated by credit information companies on the basis of information provided by its members, i.e. banks and other financial institutions.
When you default on a loan for example, your credit score gets impacted negatively, and you appear to be less creditworthy and more likely to be relying on debt to make ends meet. Hence, to have a ‘good’ or healthy credit report you need to ensure timely payment on existing debt and ensuring that you balance your spending wisely.
What are the most common credit mistakes?
Young adults typically err on the following counts –
  • Overspending
  • Missing payments, either delaying paying off outstanding dues or skipping payments altogether
  • Defaulting on loans, or having an account sent to collections
Being prudent about debt
One of the key reasons that young adults tend to make financial mistakes is the non-exposure to credit previously. When you’re more likely living at home, or dependent on parents to fund your education and possibly  even support you until you move out, it is likely that you do not have an estimate on living costs, how to balance a budget etc. Hence, with the newly received income, it is altogether possible that a person is likely to cave in to temptation and gravitate to a lifestyle that is (at that point) truly beyond their means. The survey showed that 72 percent of the respondents had received no personal finance education before they went on to college.
Credit cards also tend to bog young adults down. This is because when offers come in, availing of multiple credit cards seems like a good idea not only because they make an impressive array in the wallet but also because most cards have tempting initial offers. These include waiver of fees, bonus reward points on joining etc. which are attractive initially, but if used unwisely can prove to be a debt trap.
Another aspect that people tend to overlook is the CIBIL score. Most young adults are not familiar with the concept, and this is likely to lead to them not taking the right measures to maintain a good score. A score can be the key to fulfilling your financial dreams and unwise spending can damage it significantly.
Further, without the proper knowledge about personal finance, young adults can tend to be more irresponsible, as the gravity of the concept has not sunk in. Hence knowing what personal finance is all about could help bring down the number of individuals struggling with credit.
In conclusion
The impact of this spending can have future ramifications, with not having to curb drastically on lifestyle spends, but also having to pay off dues well into your 40s. Globally, with credit reports being accessed by employers, landlords and utility companies, the damage may be more extensive than you first imagined.
The bottom line is, one of the ways to break this cycle is to provide targeted education for young adults new to credit, and create awareness around the same.
Further, for those already concerned about their credit score, consider availing of the services of a credit health management company  to improve cibil score.

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