How to master credit in your 20s

Confidence and education are key

Before we go any further, I want to clarify that credit isn’t just about money. Yes, money is a big factor, but it’s not the only one that plays a part. The first thing that should be done before applying for any line of credit is to understand what exactly credit is. We’ll explain this in more detail further in this article but education is key when it comes to mastering your credit use. Virgin Money’s latest research shows that 60% of our Gen Z panel don't use credit cards mostly because they find credit intimidating and lack confidence in understanding how it works, meaning they're unsure they're making the best possible credit choices. Educating yourself about how credit cards work and the different type of credit cards that are available will help you to feel confident when using your own.

What is credit and how does it work?

What actually is credit? Well, to put it simply, credit is money that you’ve borrowed. This is usually from a bank or financial institution who agree to lend you a certain amount of money that needs to be repaid within a set timeframe, often with interest on top. The forms of credit you’ll most likely come across are overdrafts, credit cards, loans, mobile and car financing and mortgages.

The way credit works is you’ll apply for a line of credit (for this example, let’s use a credit card) typically online. The lender (the bank or institution giving you the loaned money) will then run a credit check on you – this is considered a ‘hard check’, we’ll talk more about these later on in the article. A credit check is a check that is done when you’re applying for a new line of credit that looks at your financial borrowing history. This shows lenders how reliable you are at repaying back money you’ve borrowed. Once that check has come back good, you’ll be approved for your credit card which will be sent to you in the post. It will detail everything you need to know such as the card interest rate (the money you pay on top of the money you spend in return for borrowing), repayment terms and warnings such as what may happen if you miss any payments. It’s very important to read and understand this before using any line of credit. From there, you’re good to go!

Another form of credit that you may be aware of is Buy Now, Pay Later (BNPL). BNPL is a service that allows customers to make a purchase, use this at the checkout and delay payment for 30 days or split that payment into 3 interest-free instalments. You don’t need to apply for this before reaching the checkout like you do with the other forms of credit we’ve mentioned above.

Credit cards are regulated in the UK meaning that your money is protected, and credit card companies are liable for any issues that may occur with purchases you make on a credit card over £100. It is important to note that BNPL isn’t currently regulated in the UK and you should be mindful when making purchases using these services.

If you're looking for a regulated and more rewarding way to pay later then Virgin Money have launched a new product that does just that - Virgin Money Slyce Link opens in a new window. You can Slyce any monthly spend of £30 or more into handy instalments and there's no instalment fee when you pay in one, three or six monthly payments - 9 & 12 month plans come with a fee. Slyce can also help you become more credit confident as you can track your credit score and learn to boost it with the exclusive in-app content and guides.

Understanding credit terms

There’s so much terminology that’s often thrown around when it comes to credit that it can easily leave you feeling confused. Here are some of the key terms you’re likely to come across and what they mean:

• APR - stands for Annual Percentage Rate and this shows how much it will cost you to borrow money each year. This rate includes any fees that you need to pay and is shown as a percentage.
• Interest rate - interest refers to the percentage of the amount you have borrowed that you have to pay back to your lender, on top of the borrowed amount. This interest is paid as a fee for borrowing money.
• Default - this is a notice that is put onto your credit file when you break the arrangements of your credit agreement. For example, if you have a credit card and have agreed to repay the minimum each month but miss payments, you would have broken your credit agreement. When you do default on a credit card, the credit lender will require you to make repayments to clear the balance and will close your account once it’s cleared. Defaults remain on your credit file for six years.

Ace your credit payments

We’ve spoken about how credit works and understood some of the key terms. Another key element is mastering your repayments. Here are some tips to help you stay on track:

• Set up a direct debit - credit card providers will allow you to set up a direct debit so you can make repayments of either the minimum amount or an amount of your choice on a day of your choice. You might want to set the direct debit date to just after your payday, so you know you’ll have enough in your account to be able to cover this payment. This gives you the comfort of knowing that you’ll never miss a repayment as a missed payment could negatively affect your credit score.
• Only spend what you can afford to pay back (including the interest!) - as tempting as it may seem to spend your entire credit limit, you need to have a plan on how to pay this money back. Credit isn’t free money and needs to be repaid so be sure to factor this into your finances when deciding to make purchases using lines of credit.
• Try and repay more than the minimum amount - wherever possible, it’s always wise to try and repay back more than the minimum payment each month to your line of credit. Credit becomes more costly over time as you're repaying not only what you borrow, but the interest on top. Even just £10 more than the minimum repayment amount can help to cut that time down a lot faster.

Building your credit score for the long term

Even if they don't right now, credit scores will impact many of your future financial decisions. From purchasing your first home to buying your dream car, credit scores play an important role when it comes to being approved for these lines of credit. That’s why it’s necessary to know your credit score and work to improve it for the long run.

In the UK, we have three major credit reference agencies that you can use to check your credit score - Experian Link opens in a new window, Equifax Link opens in a new window and TransUnion Link opens in a new window. You can check your credit score for free with Experian and they’ll update your score every 30 days. Before applying for a line of credit it’s always a good idea to check your score beforehand as it’ll give you an idea about what kind of offers you’ll be eligible for, depending on your score. A higher score = better deals. A lower score could mean you’ll only be offered subprime credit cards which are credit cards that tend to have high interest rates and could potentially lead to repayment difficulty if not kept on top of.

When you apply for lines of credit, two types of checks can be carried out on your credit file - soft checks and hard checks. They both have different effects on your credit score so it’s important to know the difference:

• Soft check - this is a check where lenders check your credit file on a surface level. They’ll just look at top-level information such as your name, where you live and occupation to be able to give you a quote or an idea of your approval chances for a line of credit. These checks often happen when you’re on comparison sites searching for quotes or checking your credit score. Soft checks have little to no effect on your credit score.
• Hard check - this is a check where lenders do a deep dive into your credit file. With these types of checks, lenders are looking at information such as the number of credit lines you have out and how much these amount to. This check is carried out when you apply for a new line of credit, such as applying for an account with an overdraft or applying for a loan. Hard checks can negatively impact your credit score if it ends up failing or your application is declined.

Being aware of how these different checks work and how they can affect you will help you to navigate the use of credit with knowledge and confidence!

Credit can seem like a confusing topic but hopefully this article has helped to demystify some of the questions you may have. Working on your credit in your 20s can really help to put you in a good position later in life when you need it. Remember, small and frequent actions to improve your credit in the short term will help you in the long run!