March 14, 2016
Many young people enter the real world today without receiving so much as a crash course in credit cards and money management.
In fact, many millennials don’t even know the basics of how credit cards work — including what their spending limits are and what interest rate they’re subject to, several studies show.
“They think they know enough to get by and they actually don’t,” said Sandra Bernardo, manager of consumer education for Experian, which polled millennials on credit cards and credit scores.
That lack of knowledge can lead young consumers to make costly mistakes at exactly the time when they should be establishing their credit to make it easier to access loans later on. Take a look at some of the most expensive blunders millennials make when it comes to credit — and what can be done instead:
Not knowing the credit limit. One of the basic questions credit card holders should ask themselves is “how much can I spend?” But roughly a third of millennials surveyed by Experian did not know the spending limits on their credit cards. Lacking that fundamental knowledge could make them more prone to costly mistakes. For instance, about 30 percent of millennials said they had maxed out a credit card. Maxing out credit cards can hurt your credit score if you don’t pay the card off in full each month or if you start start falling behind in payments, Bernardo says. Banks don’t like to see consumers use most of their available credit, so carrying a high balance can hurt one’s credit score.
To get in the game, young consumers should first figure out their credit limit. Then try to pay the bill off in full each month to avoid interest charges. If they can’t afford the complete bill, then pay enough of their total balances so that they’re using less than 25 percent of your total available credit, Bernardo says.
Not understanding how interest charges work. More than 50 percent of millennials surveyed didn’t know what interest rate was being charged on their credit cards, Experian found. Many young credit-card holders also don’t understand how those interest rates are charged, says Sean McQuay, a credit card expert for NerdWallet, a personal finance website. The most important thing to know is that all interest charges are waived for cardholders who pay their balances in full each month, McQuay says. Keep in mind that the rules are different for cash advances, which face interest charges even if they are repaid in full at the end of the month. Consumers who don’t understand these basics could find themselves paying more fees than they expect.
Not knowing how late payments hurt their score. Payment history is the single most important factor when it comes to determining a person’s credit score, accounting for 35 percent of the FICO score. So falling behind on payments can hurt that score, but only if that payment is more than 30 days late, says McQuay. Late payments that are made within 30 days of the due date do not show up on your credit report and don’t count as a late payment for credit scoring purposes, he says. So if someone misses the due date, there’s still time to avoid damage to his or her credit score. But paying late can hurt consumers in other ways. Most banks charge late payment penalties to cardholders who miss their due dates, he says. (Those late payment fees can be as high as $27 for the first missed payment and $37 for the following ones, according to CreditCards.com.) And in some cases, consumers who miss payments may face higher interest charges, McQuay says.
Not checking their credit report. Most millennials, about 60 percent, said they wait more than three months before checking their credit reports again, according to Experian. That’s still often enough to take advantage of the three free credit reports consumers can download each year, one from each of the major credit bureaus, through AnnualCreditReport.com. But of those consumers, 35 percent said they didn’t think checking their reports was necessary, according to Experian. About a quarter said they worried it would hurt their credit score. That misinformation can be costly.
Checking credit reports is the best way to keep track of the loans and credit cards in one’s name and to make sure there are no mistakes dragging the credit score down. Credit reports can also help consumers spot identity theft if they find a loan or credit card that someone else has opened in their name. And while it temporarily may ding consumers’ credit scores when a bank pulls their credit report, it doesn’t hurt the score when consumers pull their own.
Not asking for a better deal. Most consumers who ask for a lower interest rate or to have a late payment fee waived by their credit card companies have those requests granted, according to a report from CreditCards.com, thus saving them some money. But millennials are less likely than the average cardholder to speak up, the study found. Among 18- to 29-year-olds, only 10 percent have asked for a late payment fee to be waived, compared to 22 percent of all adults. And only 3 percent have requested a lower interest rate, compared to 19 percent of all adults.
Note: An earlier version of this story misattributed the statement about how high late payment fees can be and the study about asking for better deals. The story has been corrected.