Under 30? 5 Ways How 20 Somethings Can Establish a Credit History
If you’re between the ages of 20 and 29, you might describe yourself as feeling care-free for the most part. Of course, there are some downsides to being a twenty-something, especially in this economy. Fewer job opportunities, high tuition fees, increasing costs of rent – it’s not fun, but you manage. However, a lot of young adults (even those in their early 30s) are neglecting a very important aspect of life. We’re not talking about getting enough sleep or eating healthy. We’re talking about how to establish a credit history that’s healthy. You want to make your 20s the decade where you set a good foundation for the rest of your life. Your credit can send waves throughout your life, so they had better be positive ones.
Sobering Realities of 20-Something Finances
There are numbers for your age group that may not reflect you as a person, but you should still look at them carefully. They can serve as a reminder as to why you need to take credit and finances seriously. Take this number for example – only 18% of 18 – 26 year-olds could answer four or five questions on a financial literacy test. The numbers for older millennials (27 – 34 year-olds) weren’t much better as only 24% got four or five answers correct. It’s safe to say our public schools need to revise their curriculum.
Student debt seems unavoidable nowadays since most households need help to pay for school. But when you combine job scarcity, high living costs and a national debt average of $27,000 for post-secondary grads, some young people are bound to have problems. That number doesn’t include additional expenses, such as public transportation fares, parking fees, food and other expenses students make in college.
Less young people are investing, and more admit to overspending and carrying large balances on their credit cards. Hopefully, if you do carry debts of any kind, you are able to manage them. But since you’re young and have many years ahead of you, there’s a lot you can do to establish good credit now and for the years to come.
Don’t overspend and take advantage of discounts
The easiest, most overlooked yet simplest way to avoid bad credit is by learning to spend wisely. It’s not necessarily about penny pinching. What this advice means, is to spend where and when it’s necessary. So yes, you need to pay for clothes, food, rent or maybe a car, but all of these should be tailored to a budget. Ultimately, you want to have money left over, so that you can save money and pay off any debts you may carry. Your savings should go towards emergencies and can also go to your retirement (even though it’s decades away). Also, take advantage of discounts. Retailers are often nice to students (and school grad alumni), so take advantage of them.
Avoid late payments or missing them completely
Being in your 20s can be stressful at times, even if you have no kids, are not married and live at home. You might still have a demanding job, debts to pay off, places to go, and other obligations. And with all that stuff going on, you might forget things. The one thing you don’t want to forget are your bill payments. If necessary, mark a date on your calendar as your designated bill payment day, or get an app or email alert (most banks offer this if you do online banking) that will remind you of a payment.
Limit the amount of accounts you open
At some point, you may consider applying for a second credit card or a loan for something else. Be careful though. Applying for too many accounts can lead to a credit hit. You certainly don’t want that to happen since you’re just establishing your credit profile. Again, being frugal with how you spend your money can minimize the temptation to open another account.
Check your credit score/report every year
Think of your credit the same way you treat your body. Hopefully, you go for a physical checkup, because it’s a means for you to keep track of your health. Doing so makes it easier for doctors to find problems early, so they don’t get worse. Likewise, you should check your credit annually. It’s good for you to see your score, and how your transactions, amounts owed and payment history affects this number. You’ll have a greater appreciation for your credit. But you should also check your report frequently, because errors do happen and you’ll want to dispute them. Sometimes, the wrong information gets across to credit agencies, and your score gets dinged because of it. A regular “checkup” so-to-speak can make these errors apparent, giving you time to address them.
Mix your credit
Something you were most likely not taught, is the concept of mixing credit. There are different kinds of credit, such as revolving credit (ie. credit cards) and installment credit (ie. car loans), and creditors want to see that you can handle a good mix of them. So don’t rely solely on your credit card. Although you need to be careful, you can add a loan payment of some sort, such as an auto loan for a car. Your student loans also fall under the category of installment credit. The lesson here is to keep a nice “mix”, so that lenders have a more detailed picture of your credit profile.
Keeping Your Head Above Water
Understandably, establishing good credit can seem intimidating. And if you’ve heard some of the horror stories that others have had with their credit, you might be on edge especially if you are just starting out. Fortunately, there are some reminders that can keep you on track.
Tips for Establishing Good Credit Without Sinking
- Get advice from a financial advisor – If you ever have questions about building your credit, a financial advisor can offer you insights on the best way to do it.
- Don’t follow your friends – Sorry to say this, but your friends shouldn’t be your financial role model (unless they’re financial gurus). Many of them come from different circumstances, and are in the same position as you – they’re just starting. So it’s better to follow the advice of those who are qualified or experienced.
- Read financial literature – We’re not talking about novels written about finances. Rather, we’re talking about books that teach you how to save and spend effectively. Many of these lessons were not covered by your school’s curriculum.
20 to Life
The freedom and spontaneous nature of being in your 20s is something you should cherish. Travel, meet new people, and learn new skills – you’ve got the time and the energy. But you’re also at an age that serves as a setup for the rest of your life. While it’s true that your 20s won’t guarantee the health of your finances in your 30s, 40s, 50s and beyond, what you do now can have a strong impact on the years to come. In fact, it’s not surprising to hear many older adults who are still paying off student loans and expenses from their college years. So do yourself a favour for later years – get financially literate and leverage your money to help you keep a good credit score for life.