A couple of weeks ago, I had an interesting conversation with a young man (20 years old) about his credit situation. He understood the value of good credit and was trying to figure out how he could take the next step in boosting his score. We talked about the moves he made to this point and what he should do next to diversify his credit and present as a better prospect. He wants to buy a home at some point, which is why it’s important to him to manage his credit now.
As we talked, I was reminded of a recent survey from Credit Karma about the financial mistakes made by young adults as a result of lack of financial education. My friend’s mistakes weren’t as devastating as what others have done to their situation, and he had been sufficiently conservative with his money to avoid serious debt problems. Others aren’t so lucky, though. According to Credit Karma, some of the major mistakes many young adults (68%) make before turning 30 include:
- Overspending on credit cards
- An account sent to collections
- Defaulting on a loan
- Missing payments
According to the survey data, about 75% of the respondents felt like their financial mistakes made before age 30 impacted quality of life in a negative manner. The mistakes made in your 20s can affect you years down the road, and even prevent you from moving forward with your life as you would like.
Lack of Financial Education One Reason for the “Credit Fumble”
Credit Karma refers to this situation as the “credit fumble,” and points out that 73% of those surveyed said they would have made fewer credit-related mistakes with better financial education. Indeed, about 69% of the respondents said that they didn’t even properly understand what credit scores were when they got their first credit card.
The survey indicates that only about 28% of respondents had some type of personal finance education prior to college. Most of those who had any financial education at all received it from their parents.
The young adult I spoke with hadn’t learned about credit scores from his parents. Instead, he learned about them on his own, researching heavily when the interest rate on his car loan ended up being much higher than the advertised rate. At the time of his loan application, he didn’t realize that his thin credit file meant a much higher interest rate. He began researching credit scoring and trying to figure out what to do. Unfortunately, it led him to open a large number of department store credit cards, rather than applying for a card from a major bank. The next time he applied for a loan, the officer at the bank told him that it looked like he lived too much on credit cards — even though he paid off his meager balances each month.
After our conversation, my friend is ready to make some changes in the way he handles credit, and the way he proceeds with his money. Unlike many other young Americans, he’s in a position to quickly recover from some of his mistakes. According to this recent survey, many young adults are not nearly so lucky — and a little financial education might go a long way toward preventing financial problems in the future.