6/21/2011 4:51 PM ET|
5 ways young adults ruin their credit
When you're newly on your own, you need just about everything, and plastic can become a big temptation. But money missteps now could cost you for years.
Credit seems like one of those things that should develop slowly -- the fine wine of your finances. The small actions you take every day would collect over time so that, in a few years, your high credit score would help you sail through that new car purchase, apartment lease or mortgage application.
That may be true for good credit habits. But money mistakes when you're just starting out can trash your credit score, saddling you with bad credit and making goals harder to meet.
Consider these five ways you can ruin your credit -- and how you can avoid them:
1. Charge it to the max
That $600, $2,000 or $5,000 credit limit can feel like free money waiting to be spent. It's especially hard to resist when you're on your own for the first time and need so many things: clothes, groceries, a flat-screen TV or an actual chair to sit on in your new place.
But charging up to your limits on plastic can put your credit score in a world of hurt. Lenders evaluate your debt-to-credit ratio. If they don't like what they see -- if you have reached your limit on one or more cards -- you become a risk. Lenders will suspect you are one big expense away from being unable to pay. Experts recommend using just 10% to 30% of your available credit.
And they may be right! If you can't pay off your card in its entirety each month, try to keep your balance comfortably under the limit. Then, once you've established a pattern of regular on-time payments, use your improved credit to apply for a balance transfer credit card with a lower annual percentage rate that will help you pay down your balance sooner and qualify for better cards. (Compare credit cards here.)
2. Miss due dates
Your credit card bills may take a back seat to the other critical expenses in your life -- rent, utilities and student loan payments. If you're struggling to meet those obligations, your card statement may be at the bottom of the pile for getting paid. But late payments on credit card bills can lower your credit scores.
If paying bills is a challenge, try to pay at least the minimum on your cards each month, on time. And look for ways to cut expenses and increase your income.
3. Co-sign a loan
Here's the scenario: Your boyfriend or girlfriend really needs a loan for a new car, but the bank says no way without a co-signer. You may think you're merely vouching for your soulmate's character, but you're really saying, "I'll pay if he or she doesn't."
You have one good possible outcome: He or she makes every payment on time, and, four years or so later, that loan is gone. But consider the other possibilities, from a crisis that makes him unable to pay (job loss, injury) to the worst-case scenario -- he just walks away from the debt. You'll inherit the debt, the collector's harassing phone calls and the damage to your credit, too.
When your sweetie asks you to co-sign, offer to ride the bus with him or her instead.
4. Collect credit cards like Beanie Babies
You hear this once a weekend: "If you open up a new credit card with us today, you'll get 10% off your purchase! That's going to save you $8 today! It takes one minute to apply!"
Your wallet already has your favorite card, a backup "just in case" and your debit card -- but that $8 off sounds good. Store and regular credit cards often come with tempting perks. But a collection of cards in your wallet -- meaning you have ready access to potential debt that would be challenging to repay -- can ding your creditworthiness.
Stick to the fewest possible cards you need, and select cards with perks you'll use regularly, such as one of the best rewards credit cards.
5. Blow off your other bills
You may imagine your credit report and score are based entirely on what you do with your MasterCard and Visa. However, it's not that simple -- your habits with all your bills figure into the big picture of who you are as a borrower. If you're regularly late paying your electric bill, for example, your credit report may turn off future lenders before the power company turns off your lights!
Set up a system to pay your bills on time or have them paid automatically from a bank account.
Use your credit cards thoughtfully, avoid unnecessary debt and pay your bills on time (the most important step for building a good credit score), and you'll end up with a credit history that takes you successfully into early adulthood and beyond.
This article was reported by Jennifer Rose Hale for CardRatings.com.
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Most adults don't even read the contract when they sign up for a credit card..or what effects their credit score...
Having read some of the reply posts- it seems some people just don't get it.
You can't have perfect credit if you don't have any credit... I went 9 or so years thinking I don't need credit- for the most part that went pretty well when I was younger- just saved up for what I wanted and bought used at times- which can be hit or miss (a lemon can cost more in the end) or you get what you pay for- well long story short when I was in my early 20's I wanted the nice car and to buy a house- but guess what I was turned down for a lack of credit history- then it was a catch 22 each time I applied for credit and was refused it hurt my rating even more- so I quit applying and just did the secure credit "credit card" your limit is what ever your deposit is- I started with $500 and used it carefully for 6 months then I increased it to $1000 from a 2nd deposit of $500 which I got from a tax refund- well with careful usage at 15 months from when I first opened the accoumt-my deposit was refunded back to me and they changed my secure credit to unsecure with a $1500 limit- if you're wondering which bank I did this with at the time it was Citi Bank. So since then I'm in my early 30's have already paid off a $28,000 car loan and now I can purchase a home if I want with a mortgage cheaper then paying rent. I just havn't decided on buying a home because I'm not sure if I want to live where ever for 30 years lol well that's my credit story and to this day I only have 1 major credit card only for emergency purposes and no store or gas card-
PS... even millionaires have credit... the better your credit rating the lower the interest rates- you never know when you have a emergency medical or car repair and it would be stupid to carry around so much cash- and your ATM card has a cash limit usually $300 to $500.
Also with good credit rating it would help a lot if you wanted to start your own business as well!
they missed the biggest thing that ruins young adults credit .. even more than credit cards. it's student loans - the more you take out the bigger of a hit your credit will take. borrow 25-30K to go to school and kiss the pristine credit goodbye as your income to debt ratio will make your score plumment.
Credit is needed to obtain a mortgage or a car loan. Pretty much everything else you need to purchase can be procured by using a debit card. Perhaps getting a rental car is one of the few exceptions. Furthermore, if you co-sign a loan for someone, you better be in a position to make a gift of paying off whatever balance is on that loan when/if the primary obligor A) dies, B) goes to prison C) is disabled D) goes bankrupt--you get the idea. It's not just a matter of "signing for them". You are agreeing to be liable to pay that debt if the person you are "helping out" can't/won't pay it. And co-signing a debt for your honey when you are not married to him/her is about one of the most epically stupid things you can do to your financial well being. Things are always wonderful until they are not, and when they no longer are, then things can get very nasty indeed. Love is not forever, and in relationships, change is the only constant. If your beloved is such a wonderful human being, let her family (the people who know him/her best) co-sign for her.
A little free advice from a middle aged lawyer.
You know Jennifer I never even noticed... what was I thinking?
Thanks for bringing that to my attention.
Im a 22 year old and I never charge more than what I can afford, sometimes it takes me a month to pay it off but it gets paid off in the end. Knowing what your budget and income are important things to know. Also having a small credit limit is better so you can not make alot of purchases.
"If stores keep bugging me to take out their credit card to save 10% on that days purchase, I always end up saying something like "I have an excellent credit rating because I don't take out every credit card available". That usually gets the clerk to stop pushing."
huh....I usually just say, "No I would not like your card," and they don't say anything else....Maybe it's my intimidating stare? I've never had a problem with pushy salespeople.
"If you can't pay off your card in its entirety each month, try to keep your balance comfortably under the limit. " Implying that these kids should even consider carrying a balance is DEFINITELY sending the wrong message to these young people.
Having a Credit Card means that creditor is extending you a 30 DAY loan only. Anything beyond that is a mealticket for the credit card companies.
BOTTOM LINE: DO NOT SPEND ANYTHING ON A CREDIT CARD UNLESS YOU CAN PAY THE FULL BALANCE AT THE END OF THE MONTH. IF YOU CAN'T, YOU SHOULDN'T BE BUYING IT AND YOU DEFINATELY SHOULDN'T BE USING A CREDIT CARD. LEARN TO SACRIFICE AND LEARN TO DELAY YOUR GRATIFICATION UNTIL YOU DO HAVE THE MONEY. This is what a responsible adult would do (most of us anyway).
With this philosophy, credit card can never make any money off of you, just the merchants. And of course, you don't have to give a S**t what interest rate they charge you. You're using them...not the reverse....
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