We all make some foolish decisions in our 20s — it’s pretty much a rite of passage. But while most of these choices will be forgotten a few days or weeks, the financial ones have a habit of sticking around.
In fact, when it comes to your credit, you can easily make mistakes that will haunt you for years, even decades. And, damaging your credit has some very real consequences: Low scores could make it harder to get an apartment, car loan, or mortgage. (Not sure if you’ve got a credit file yet? Checking your credit reports and FICO scores — which are the most widely-used type of credit score — is almost as easy as opening a free bank account.)
Right now, you’re in a powerful position: You can either build your credit slowly and responsibly, or you can ruin your credit for years to come. Here are the seven worst credit mistakes you can make in your 20s. Once you know what they are, you can hopefully steer clear!
1. Charge More Than You Can Afford
The first and most common step in ruining your credit is living above your means.
That’s what Clarrisa Lee, who blogs at Later-Means-Never, did in her 20s.
“I didn’t have a lot of money growing up,” she says.
“So when I got access to credit, it felt like I’d won the lottery and I could buy everything that my heart desired — which I did, and which has cost me for decades.”
Now in her 40s, Lee is still paying off the debt she incurred more than 20 years ago.
What to do instead: Use your credit card as a tool to build credit, and never as a loan. Only buy what you can afford to comfortably pay off each month. When you pay your statement balance in full, you’ll never owe interest — but when you only make the minimum payments, you can drown in debt.
Here’s an example of what can happen if you only make the minimum payments:
- Say you charge $5,000 to your credit card at a 19% interest rate.
- You can’t afford to pay off the $5,000 bill, so you only make the minimum payment of $200 per month.
- It will take you almost 12 years to pay off your balance — and cost you more than $3,000 in interest.
2. Carry a Balance on Your Card
When Mike Pearson, founder of Credit Takeoff, was in his 20s, he believed a common credit myth: carrying a balance on his card would improve his scores.
“For the first several months of having my first credit card, I kept a small balance rolled over from month to month, because I stupidly thought it would boost my credit scores,” he says.
“This caused me to pay several hundred dollars in interest.”
What to do instead: Pay your statement balance in full each month. Carrying a balance doesn’t help your credit; it only leads to interest charges and a higher credit utilization ratio (which we’ll explain below).
3. Max Out Your Available Credit
Maxing out your cards is another surefire way to harm your credit. That’s because doing so increases your “credit utilization ratio” — or the percentage of available credit you’re using — a number that comprises 30% of your FICO scores.
“I thought I could get by just paying off the minimum, until one day I realized I was using over 75% of my credit line,” recalls Russ Nauta, owner of CreditCardReviews.com.
“My credit scores took a deep dive.”
Here’s how this can happen:
- Card A has a $1,500 credit limit and balance of $1,250.
- Card B has a $500 credit limit and balance of $250.
- In total, you have $2,000 of available credit.
- You’re using $1,500 of it (or 75%), which might make lenders think you’re struggling to pay your bills.
What to do instead: Only spend a small percentage of your available credit, and strive to pay your statement in full each month. While some experts recommend a maximum of 20% credit utilization, the truth is: the lower, the better.
4. Miss Credit Card Payments
So, you bought drinks for the whole bar, or splurged on some designer sneaks — and then realized you couldn’t afford to pay your bill. The biggest mistake you can make? Deleting your statements without looking at them, neglecting to even pay the minimums.
Since payment history is the single most important FICO factor, accounting for 35% of your scores, that’s like taking the fast lane to terrible credit.
Even if you know how detrimental missing payments is, you can still slip up. Just look at what happened to Self Lender CEO James Garvey when he went on his honeymoon in Argentina.
“One of my credit cards was not set up on autopay and the bill went unpaid for two months,” he says.
“As a result of my dumb mistake, my credit scores were damaged for years.”
What to do instead: Set up autopay for all your bills, then set a reminder to go over your finances once a week. Log into all of your accounts and mobile banking apps to A) check your charges and B) make sure your payments have successfully gone through.
While we strongly encourage you to pay your statement in full, you should always make at least the minimum payment to avoid late fees and credit damage.
5. Close Your Credit Cards
You’ve finally paid off a credit card, and you’re so excited to be debt-free that you immediately close your account. In doing so, you lower your “average age of accounts,” which makes up 15% of FICO scores. Womp womp.
“The biggest credit mistake we made in our early 20s was closing down credit cards we no longer used,” says Brittany Kline, co-owner of The Savvy Couple.
“Looking back we should have kept them open to grow our credit history.”
What to do instead: Although you’re welcome to cut up your credit card so you can’t use it anymore, don’t close the account — especially if it’s your first or only card. Keeping it open will maintain your average age of accounts, and if the card has a $0 balance, will also help lower your credit utilization ratio.
6. Ignore Your Student Loans
Even if you took out student loans when you were just 18 years old — barely an adult! — they still factor into your credit scores. And a quick way to harm your credit is to neglect the bills (as overwhelming as they may be).
Marketer Destinee Wright took out thousands of dollars in student loans to pay for college. After graduating, she let one of them fall into default — a move that ruined her credit for years to come.
“I’m still digging myself out of that hole,” she says.
What to do instead: If your payments are unaffordable, ask your servicer about income-driven repayment plans, which extend your repayment period and cap your payments at a certain percentage of your income. Although you’ll pay more interest, that’s infinitely better than defaulting on your loans and damaging your credit.
If you’re experiencing temporary financial hardship, you can also consider applying for deferment or forbearance, which will pause your student loan payments (but not your interest accrual for unsubsidized loans) for a certain amount of time.
7. Avoid Credit Entirely
The last way to ruin your credit might surprise you: It’s to never use credit at all. If you eschew credit cards or other loans entirely, you won’t establish a credit history, and lenders won’t know whether you’re a responsible borrower.
That will make it extremely difficult for you to get financing for purchases like a home or car.
What to do instead: If you want to build your credit over time, apply for a starter credit card that helps you build credit, and then do everything you can to pay your bills on time and in full. Alternatively, if you’ve already damaged your scores, consider getting a “secured” card specifically targeted at helping people rebuild their credit.
How to Not Ruin Your Credit: Proceed With Caution
Now that you know seven guaranteed ways to ruin your credit, we hope you’ll follow the alternative advice, and slowly build your credit up from the bottom up.
Remember: The important thing isn’t to avoid credit; it’s to use it responsibly. Take it from us thirtysomethings — and don’t repeat our mistakes!
This page is for informational purposes only. Chime does not provide financial, legal, or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial, legal or accounting advice. You should consult your own financial, legal and accounting advisors before engaging in any transaction.