Many of us treat our twenties as a time for exploration and a few mistakes while we figure out what to do with our lives. Don’t let credit mistakes haunt you. Here’s what I wish they taught about using credit as a young adult.
Build Credit However You Can
Credit isn’t just an alternative to cash. In the financial world, credit tells lenders whether they can trust you with money. It can affect how easily you’ll be able to buy a car or a house, and what interest rates banks will offer you on loans.
The problem is, building credit can feel like the vicious job-experience dilemma: You need a card to build credit, but card companies may be hesitant to approve a card to someone with no credit.
Applying for a more basic credit card may be more achievable than a card recommended for consumers with excellent credit. If you’re still getting rejected, or have poor credit (not just little or no credit history), try these options:
- Apply for a secured credit card. These cards work more like a bank’s debit card. You add cash to an account, and you can only charge the balance you have. Responsible use over time can strengthen your credit score.
- Report your rent. Certain versions of FICO and VantageScore factor rent information into your credit score. The three major credit bureaus (Equifax, Experian, and TransUnion) will also list rental information on your credit report if it is provided. A history of timely payments can signal credit card companies that you’re responsible with money. Some big landlords report rent history to the credit bureaus, however, some smaller landlords do not and for a fee you can pay for a service to report your payments with Rent Reporters or get your landlord to sign-up up for the service with ClearNow to report your rent payments (at no cost to you).
Set up Autopay, or at Least a Payment Reminder
You’re busy. Most twenty-somethings are juggling some combination of school, jobs, moving, financing life changes like marriage or babies, and more. It’s all too easy to lose track of a credit card payment deadline.
Set up autopay if possible. This is a good option if you generally live within your means and can basically predict how much your monthly payment will be. If cash flow is an issue, you may be nervous about the chance of overdrafting your bank account. A good alternative to autopay is to set up an auto-reminder on your mobile device’s calendar and/or through your bank’s bill pay system. That’s your cue to pay as much as you can afford.
Store Cards Are Never a Good Idea
In my twenties, I signed up for a store credit card on a few occasions. Typically, the scenario involved me preparing to spend two weeks’ worth of grocery money on work clothes, because I couldn’t wear my college hoodie in the office all winter. So, when the associate at the register told me I could get 10% off, right then and there…Sign me up, right?
I have never looked back and thought, “Wow, what a great decision that was.” Store credit cards often come with high interest rates. You may also get added to a mailing list, which is annoying and tempts you to buy stuff you don’t need. Because you only use the card in that one store, you might forget to add the payment due date to your auto-reminder list, making you more likely to miss a payment.
A better plan is to budget ahead, and use whichever credit card earns you the most rewards points and most importantly, if you won’t be paying the balance in full each month, use the one with the lowest interest rate.
Beware Cash Advance
Swipe your credit card, and you may see a prompt that looks more like a debit card feature. Do you want to take out cash, as well as pay for your purchase? If the card is linked directly to your bank account and draws the cash from your own money, just make sure you have sufficient funds in your account. If it’s not connected to your bank, the primary rule is to avoid using credit cards for cash advances altogether. But, if you must, which card you use to get the cash matters. A credit card cash advance is a loan. You’re borrowing against your credit limit, and the credit card company wants you to pay it back. Cash advance often comes with very high transaction fees from the credit card issuer, bank or ATM fees, and high interest rates. The interest rate may be markedly higher for cash than for a purchase you make on your credit card, and interest starts accruing right away.
Unless it’s truly an emergency, you’re better off pretending credit card cash advance doesn’t exist. Make an actual bank withdrawal beforehand if you’re going somewhere cash-only.
Report Issues to All Three Major Credit Bureaus
Equifax, Experian, and TransUnion all track credit report information. You’re entitled to an annual free credit report from all three so you can monitor your credit. What you may not expect is the reports you get from each bureau may look slightly (or even very) different.
The three bureaus don’t necessarily compare notes with one another. Sometime credit reports miss information. There may even be errors (like if Katie Jones’ missed payment ends up on Katy Jones’ credit report). Checking your report across the different bureaus is a chance to make sure the information matches.
With that in mind, if you run into problems, like credit-related identity theft, notify all three bureaus as soon as you can so they can all update your report.