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 up to this point and what he should do next to diversify his credit and present himself as a better prospect. He wants to buy a home in the future, which is why it’s important to him that he manages 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 a 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 their quality of life in a negative manner. The mistakes made in your 20s can affect you years down the road. It can 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 that he would only be offered a loan with a much higher interest rate. He began researching credit scoring and tried to figure out what to do. Unfortunately, it led him to open a large number of department store credit cards in quick succession. 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 because of all the recent credit pulls from the issuers to approve his cards. It didn’t matter that he pays off his meager balances each month. He was still denied the best rates available to folks with the highest credit scores.
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.
{ read the comments below or add one }
I’m not being argumentative, Miranda, you follow this more than I do and you are one of my favorite experts. You know way more about it than me, but do you think those are mistakes due to lack of education mostly or is it a lack of self control when people overspend? Again, I’m not being judgy, I’m curious as to how you see it. I have a lot of respect for your content. I’m an old Boomer but still very interested in personal finance.
I’m obviously not Miranda but the answer is of course due to both lack of self control and lack of education. You are right. Overspending is always an issue with self control, but when you learn more about the devastating effects of overspending, the less you’ll tend to overspend.
Learning what to do also helps you spend less. I recently switched mobile carriers (again). So in a span of 10 years, I went from $150 a month to $50 a month and now $35 a month all while getting more data for my family plan. Now that I know the new carrier is just as great, I will tell my friends about it so they can learn how to save.
Finally, learning about the power of compound interest can also help you find the motivation to be disciplined with spending. We all take stock market long term gains as gospel by this point, but that’s not what the masses think. If only they’ve seen how saving every dollar can turn into $10 or more in retirement, everyone would think twice next time they buy something that they think they “deserve.”
In my opinion the best strategy to game the credit system is to not play. I think very few people gain significant advantage from extending themselves to earn ‘points’ or a higher FICO, and lots of people fall into the many traps that snare the unwary. Think about it ‘top prize’ for those who navigate the obstacle course is more rope to hang yourself later. And even the ‘deadbeats’ who never carry a balance are most likely spending more (and so saving less) than they would if they stuck with paygo.
So yes something important is lacking in financial education, but it’s not parsing the fine print in your credit agreement– it’s how to minimize your use of credit.
You bring up a good point freebird. Our society is just too addicted to paying on credit. It not only can potentially decrease networth because we spend more but it can also make things more expensive.
Take housing for example. There would be no way a house can be worth hundreds of thousands of dollars if there’s no such thing as a mortgage!
Excellent observation, housing bubbles are blown by credit expansion.
Another area where chickens are now coming home to roost is look what happened over the past few decades as student loans got out of control. When I was a student tuition was reasonably priced so someone working retail part time could afford to attend the local college. Now we see 21 year olds paying off balances that may exceed their parents’ mortgage, so they won’t be saving for retirement, and losing those early years is tough to make up later. The sick part is that the whole process of getting admitted, reaching graduation, then landing a high-paying job is fraught with uncertainty, especially because young people embarking on that journey can’t know exactly what’s involved and how it suits them. But their student debt is non-dischargeable so they may well be paying a life sentence if things don’t work out (and they often don’t).
While people may argue about whether it’s a good idea to stretch borrow on a house (I’m personally dead set against it), student loans are a case where I think you want to use the absolute minimum.
The danger with student loans is that young people just aren’t mature enough to see the consequences of borrowing so much money early on in their lives. Aside from writing more about it on sites such as this one, we can only hope that the loan situation can be tamed in the future…
Wow, surprising how many young people are uneducated about these topics. Great article, thanks for posting Miranda.
Actually it’s surprising how many people (young or old) who don’t have much of a clue about basic financial concepts. If only we as a country do a better job at this instead of asking our citizens to learn higher level calculus in high school……