I had been working as a bartender in the evenings and a cashier in the mornings.
I’d lived in the same small town since 6th grade, and I had never made any big purchases. Everything was paid in cash.
One day, I was sitting on the front porch of my house going through my mail. In that mail was an offer for a credit card. This little piece of paper encouraged me to check my credit score. Something I had never done before.
I found my way on to Credit Karma. According to the website, I had a pretty good credit score of just about 700. I was offered a few credit cards, with really good approval odds for each.
Pretty surprising, considering I had no knowledge of what a credit score was or what it meant. I was never taught anything about credit scores, or how to protect mine. This is fairly common among people my age, actually. Our parents considered money a taboo subject, so no one ever talked about it.
My education as far as credit and financial management was nonexistent, and I was definitely not taught by example.
Anyway, back to the credit cards.
I applied for three card offers that day, and was approved for each one. This was just the start of my troubles. I would go on to buy a brand new car. Then open up a store credit card and subsequently max it out. I quickly started drowning in debt.
When it comes to how not to ruin your credit score in your twenties, I’m the perfect example to learn from.
I’ve been there, done that and don’t ever want to go back.
So, without further ado, here are 10 ways to not ruin your credit score when you’re young:
⦁ Maintain Steady Employment for at least a Year If you want to make sure that you don’t ruin your credit, you have to make sure that you’re responsible enough to pay your bills on time. That you have the means to pay those bills and that you have sufficient employment history to be considered eligible for a line of credit. Lenders also like to see at least a year of steady employment. They want to know that you can afford the payments and that you’re responsible. Changing jobs frequently doesn’t scream ‘responsible adult’, right?
⦁ Open a Credit Card, or Two It’s best to have a few open lines of credit that are in good standing and open for a substantial amount of time. Future creditors will want to see that you can be responsible for your debts for long periods of time. This is something that will come into play every time you apply for credit. Say you want to buy a home when you’re 30. Getting a credit card or two and then paying the bill on time, every single month for say, 5 years or more, will look very good to that future bank you apply for a mortgage through. The main takeaway here is that you are planning for your future. Even if you’re only 18 now, 30 comes really fast. You don’t want to get to the point in your life where you’re ready to settle down and buy a home, and not be able to because you weren’t responsible with your credit. PRO TIP: Be sure to read the terms of the credit cards you plan to open. You can use a card comparison tool to decide which is right for you. The APR is a big factor, so keep an eye out for that percentage.
⦁ Don’t Max Out the Cards + Pay Off the Balance Every Month Simply put: Creditors don’t like it when you max out your credit cards. They measure the percentage of your available credit that you are using each month, and it affects your score as well as your approval odds for future purchases. My general rule of thumb is to never use more than half of my available credit. Ideally, you want to use no more than 30% of your overall available credit, but definitely keep it under 50% no matter what. Remember, the higher your usage, the lower your score is. Another way you can make sure you don’t spend too much is to only use your credit card for small purchases like gas and food. Since you want to pay off the full balance each month, you have to make sure you can afford to do that. Keep that in mind every time you swipe the card. Don’t spend $600 on your credit card if you don’t have $600 to pay it off next month. Of course, credit cards have minimum monthly payments. But, try to avoid only making the minimum payment each month. There are a few reasons for this: if you pay off the balance each month, you avoid paying interest on the card. If you’re just making the minimum payment, you’re paying interest + your card balance. Paying off the card each month shows that you are responsible with your money and lenders will be more likely to approve you for loans and purchases if they see this on your credit report. The takeaway: Only spend what you can afford to pay off in full each month, and avoid paying interest by paying off your card balance each month.
⦁ Don’t close old accounts (if you have any) Credit age is another thing that affects your credit score. Opening and closing accounts too frequently will make it look like you don’t have any long-term accounts in good standing. You want to show that you are responsible enough to make your payments on time for a long period of time. This is a mistake I made because I was unaware. I had a lot of open accounts, and I thought closing them was a good way to get them off my credit report. I was very, very wrong. Not only did the accounts not come off of my report, it then showed that my average credit age was just one year. At this time, I had had close to ten years of credit history, but according to my report, the average length of my accounts was just one year. This hurt my credit score a lot, so now I make sure to just keep my accounts in good standing and open for as long as possible.
⦁ Don’t Fall Victim to Payday Loans or “Credit Booster” Loans I live in Pennsylvania, where Payday Loans are actually illegal. For good reason, too. A payday loan is a quick and easy way to get cash if you need it, often advertised as “emergency cash” or “fast cash”. They lure you in with the promise of next day funds deposited directly into your bank account. But what they don’t tell you is that they are also going to deduct their payment from your bank account every two weeks, at an astronomical interest rate so that in the end you actually pay them 20x more than what you borrowed, or more. Yikes. Double yikes. It is such a terrible scheme, and I think more people should be aware. Stay far, far away from any payday or short-term loans. If you really do need cash right away, try peer to peer lending instead. It’s a much safer and more affordable option for securing a loan. Credit booster loans are loans that promise to help you get your credit score up. It seems counterproductive, doesn’t it? Getting a loan to pay off your other loans? My advice would be to save up as much money as you possibly can every month and put it towards paying down these debts. You could also take up a side gig and put all your earnings towards paying off your debt. It’s not the most fun thing, but it is just temporary and it will help you so much in the long run.
⦁ Get a car or other small purchase in your name (and pay it ON TIME) Purchasing a car as a young person with no real credit history can be difficult, but not impossible. If you have someone that is willing to co-sign for you, this is the perfect opportunity to start building a credit history. You need a car anyway, right? Unless you live somewhere like Manhattan, then maybe you don’t. In that case, you could lease an apartment or get a small loan to start building your credit. In any case, you will most likely need a co-signer to make this happen. (If you are denied, don’t keep applying to other lenders. I will go more into this later in the article, but bear with me here) The good news is that a lot of banks will approve you for a small purchase even if you are just starting out and have no credit history. Make sure that once you are approved, you keep that loan in good standing. The takeaway: It is much easier to make your payments on time than it is to go back years later and try to fix your credit after it’s damaged.
⦁ Only buy what you can Actually AFFORD If you’re getting ready to purchase something big, and you think to yourself “If I cut back on Starbucks, I can afford this car”. Chances are, you’ll still want a Starbucks, and it will make you feel like crap when you have to choose between a latte and your car payment. On the flip side, if you have an affinity for designer purses or shoes and you say to yourself, “Self, cut back on the Louis for a while so that we can make the car payment” that’s different. What I am saying is, if you have to give up something as small as Starbucks to afford your car payment, then you probably shouldn’t be making that purchase. This is my opinion, and the way that I’ve found helps me manage my finances best. If you want to kick your caffeine habit anyway, maybe it’s the right choice for you to skip the latte and save that money every month. The takeaway here is to simply make sure that before you commit to a purchase with a monthly payment attached, you already have the money available without having to change your lifestyle to afford it.
⦁ Don’t Apply for Credit Often The number of inquiries on your report directly affects your score. There are hard inquiries; the kind that affects your score the most when a potential creditor looks into your full credit history. Then there are soft inquiries, where they pull basic information on your credit score and history. Soft inquiries don’t affect your score as much, but they do still affect it. How to tell which is which? A hard inquiry will ask for your full social security number. A soft inquiry will only ask for the last 4 digits. Having too many inquiries on your report will drop your score. I know this sounds hypocritical, as I have just told you to open a few credit cards and buy a car. But I promise I have a good point here. When you apply for a credit card, that company will conduct a credit inquiry to make a determination of approval. This will show up on your report as one inquiry. You can control how many inquiries you have by not applying for too many cards, especially if you’re being denied. However, when you apply for a car loan, the car dealership sends your information out to as many banks as possible. Then they see which ones come back with approvals. This can really affect your credit because each one will show up as a separate inquiry on your report. I have had as many as 10 separate inquiries on my report from one car dealership. Ouch. One way to avoid this is by applying for a car loan yourself, through a credit union or your bank. You can even apply through a major bank online. Using a credit union is a really good option if you are just starting out and trying to establish credit. I highly recommend talking with a representative from a credit union in your area. The takeaway: The higher the number of inquiries on your credit report, the lower your score.
⦁ Pay All of Your Bills On Time All of your bills include rent, utilities, etc. I had no idea about this, but it really hurt my score. I didn’t know that utility companies report to the credit bureaus. So do cell phone companies, and certain places you rent an apartment or house. Fedloan, Sally Mae and other student loan services also report to the credit bureaus. Defaulting on a student loan can damage your credit severely. The worst thing is, most of these companies don’t report until you default. Try to stay up to date on these payments as best you possibly can.
⦁ Monitor the Hell out of Your Credit Report Once a year, you can download and print your full credit report from all three bureaus for free, at annualcreditreport.com. You can also check your scores on free sites like CreditKarma or CreditSesame. I recommend downloading your full reports at least once a year. If you can, download them twice a year. It’s not just important to monitor your credit score. It is also very important to keep an eye on what is happening with all of your accounts. You also should be monitoring unusual activity, like accounts that you don’t recognize or information that is being reported incorrectly. For example, after pulling my credit report one year I discovered that a lot of the accounts that I had paid in full weren’t being reported as such. I also discovered inconsistencies with my address. I then had to go through the process of disputing the accounts and having the incorrect addresses removed. It was a pain, but since my credit is so important to me, it was well worth it. The takeaway: monitor your reports, not just your score. Do so rigorously. Protect what is yours.
If you take away anything from this lengthy post, I hope it is this: no matter how young you are, or how much time you think you have to ‘deal with it later’, I promise you don’t have as much time as you think. I’m not saying “you’re going to die tomorrow so you better hurry up and get a credit card”. I’m saying time goes by far too quickly. Before you know it, you’re 30 years old, married and ready to settle down. Except, your past keeps haunting you and you find yourself in a tangled web of credit card debt, which prevents you from purchasing a house and then you feel like a huge piece of garbage. Very dramatic, I know. But I didn’t think it would happen to me either. Until it did.
Just be responsible, do your research and make smart decisions about your finances before it’s too late.