No one is perfect, and that includes when it comes to credit. Even if you’re young and just starting out, there are a few credit mistakes you should try to avoid. By understanding what these common credit mistakes that young people make are, you can take the necessary steps to protect your credit rating and maintain a good credit history.
Why good credit is important.
Having good credit is beneficial at any age, but it’s especially important when you’re starting out as an adult. Having a positive credit history and a decent credit score can help you access doors when you may need a new job, a car loan, auto insurance, an apartment, and perhaps a bank account.
You may want to begin establishing credit sooner than you thought if you want to have excellent credit. Using your early adult years, between the ages of 18 and 21, to build your credit history and score might be a good idea. However, while you’re young, it’s also crucial to understand that building one is something worth striving for—and not necessarily achieving right away.
Common credit mistakes young people make.
Young people in Australia often make several common credit mistakes that can impact their financial future. These can cause serious harm and usually stem from a lack of education and information about credit, credit reports and how it all works. Here are some common credit mistakes to avoid:
- Taking on debt and ignoring it
Many young Australians start accumulating debt when they begin earning money, often through credit cards or car loans. They then make the mistake of only paying the minimum amount, allowing interest to accumulate rapidly. - Overspending
With their first steady income, many young people fall into the trap of spending every cent they earn without setting aside savings. This habit can lead to financial instability and reliance on credit. - Not budgeting for expenses
Failing to create and stick to a budget is a common mistake. Young people often don’t set aside money for regular expenses, leading to financial stress and potential reliance on credit cards. - Not understanding credit card terms
Many young Australians don’t fully grasp the terms of their credit cards, especially introductory rates. They may be caught off guard when promotional periods end and interest rates increase. - Maxing out credit cards
Using credit cards to their limit can negatively impact credit scores and result in high interest payments. It’s important to keep credit use low and use it to improve a credit score, not decrease it. - Applying for too many credit cards
Some young people apply for multiple credit cards after reaching the limit on one. This can negatively affect their credit score and make it harder to obtain loans in the future. - Making late payments
Late payments can significantly damage credit scores and remain on credit reports for up to seven years, affecting future borrowing capabilities. - Not comparing credit card options
Many young people don’t shop around for the best credit card deals, potentially missing out on better interest rates or more suitable terms. - Using credit cards for cash withdrawals
Using credit cards to withdraw cash often incurs high interest rates with no interest-free period, leading to rapid debt accumulation. - Not reviewing financial statements
Failing to regularly check credit card and bank statements can lead to missed fraudulent activities or errors that could harm one’s credit standing.
How to start building good credit.
No one comes into the world with good credit. In fact, until you begin using credit, you won’t have a credit report or score. For most, establishing credit means starting small with a low line of credit that may require a security deposit. And if you think about it, that’s not a bad place for a young person to start. You get a card to use for emergencies or to cover expenses without too much risk of running up a giant balance.
More importantly, you get the opportunity to learn how credit works by managing an account, making timely payments, and avoiding overspending. If you handle your credit card well during college, you’ll graduate with good credit to help set you up for success as an independent adult.
Opening your own small amount credit card can be a great way to build your credit history.
Credit cards are a wonderful method to improve your credit score—but they can also set you on the wrong foot if you’re not careful. Good practice to improve your credit score and credit history is to obtain a small limit credit card and use this to pay your regular bills like your phone bill or fuel for your car.
You then immediately pay the amount back using savings or your regular source of income. This shows that you are borrowing credit and immediately paying it back, which over time, will increase both your credit score and understanding of how credit works.
