Lack of Financial Education Leads to Financial Mistakes

by Miranda Marquit · 6 comments

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.

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  • Ken says:

    Wow, surprising how many young people are uneducated about these topics. Great article, thanks for posting Miranda.

    • David Ning says:

      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……

  • freebird says:

    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.

    • David Ning says:

      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!

      • freebird says:

        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.

        • David Ning says:

          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…

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