Fresh out of college. First job. New social circle. New bike. These are a few things that are synonymous with people in their early 20s. But, what really defines this particular phase of life is the feeling of financial freedom that comes with a newly acquired power of earning. You are no longer dependent on your parents for money. You are free to spend your hard-earned money the way you want.
And to celebrate this newly acquired sense of financial freedom, most people in their early 20s tend to splurge at restaurants, bars, movie theatres etc. While spending on recreational activities every now and then is perfectly alright, your early 20s could be the best time to learn about the art of personal finance. In fact, it’s the perfect time to build up your Credit Score.
If you aren’t sure what a Credit Score is, it is a score provided to you by credit bureaus like CIBIL based on your credit history, which is nothing but your borrowing and repayment history. If you have a history of repaying your debts and bills on time, it will boost your Credit Score and vice versa. Consistent and timely payment of Credit Card and loan dues, for example, will have an extremely positive effect on your Credit Score.
Additional Reading: Ways To Pay Your Credit Card Bill
Based on how you have repaid borrowed credit in the past, your Credit Score can be either good or poor. People with no borrowing history will have no Credit Score to speak of, which could make it difficult for them to avail credit.
Now that you have a basic idea of the rudiments of a Credit Score and credit history, let’s jump into the world of millennials in their early 20s and identify the 6 mistakes they make that has a negative impact on their Credit Score:
Late Payment of Bills
The early 20s may be a time to celebrate financial freedom, but that doesn’t mean that 20 something youngsters are always financially stable. They generally rank lower on the pay scale in comparison to experienced professionals.
Due to this, 20 something independent youths tend to depend on Credit Cards since it allows them to make purchases now and pay later.
However, some youngsters are so busy celebrating their newfound financial freedom (thanks to their Credit Cards) that they forget about paying the bills back on time. People in their early 20s lose track of Credit Card payment due dates as they are still adjusting to the life of a responsible adult.
And it doesn’t just stop with Credit Card bills, millennials in the early 20s fail to pay all kinds of bills on time, including phone bills. Not paying your Credit Card bills on time can have grave repercussions on your Credit Score. So, the next time you wonder why your Credit Score has dropped, ask yourself whether you have been diligently paying your Credit Card bills on time.
Additional Reading: How Late Credit Card Payments Affect You
Carrying Too Much Credit Card Debt
Most millennials in their early 20s don’t set financial goals. They are more inclined towards living life one day at a time. Since they have no financial goals, they fail to set a budget and usually end up broke before the month is over.
If you happen to find yourself in the situation time and again, remember that it is extremely important to chalk out a budget and follow it religiously. It may not be easy, but it will certainly hold you in good stead in the future.
You can start by setting a daily budget, then move on to a weekly budget and then even further to a monthly budget. Baby steps are good, as long as you are taking them in the right direction. When millennials don’t budget themselves, they tend to rely too much on their Credit Cards.
Too much dependence on your Credit Card leads to debt, which keeps piling up with each passing month. So, when you set a weekly budget, make sure you stick to it, even if you’re down to the bare bones financially.
It’s only when you stringently start following a budget will you be able to see any positive results. A solid budget will ensure you have enough money to tide you over every month and also ensure that you have enough to clear any existing Credit Card debts. Keep in mind that carrying huge Credit Card debt can negatively affect your Credit Score.
Maxing Out Credit Cards
Many millennials tend to look at Credit Cards as a source of ‘free’ money, which is why they swipe away to their heart’s content. However, this practice spells financial trouble. Millennials are quick to max out their available credit but are slow to pay it back. In fact, it’s quite common for some of them to max out more than one Credit Card.
One thing everyone needs to keep in mind is that Credit Cards don’t offer free money. A Credit Card allows you to buy whatever you want, whenever you want, but it also means that you have to regularly pay off the amount that you swiped on your card.
If you fail to do so, not only will you attract late-payment fees, but also a high-interest amount on the outstanding balance. What’s even worse is that your credit utilisation ratio will be sky high, which will negatively impact your Credit Score.
Additional Reading: How To Be A Disciplined Credit Card User
Opening and Closing Credit Card Accounts
Millennials in their early 20s tend to get carried away every time a new Credit Card is launched, especially if it comes with exciting freebies. However, once they take advantage of these offers and joining benefits, they hastily close the existing Credit Card account and move on to another one.
Unfortunately, opening and closing accounts every now and then can lead to a decrease in your Credit Score. Changing Credit Cards too often and closing existing accounts only ruins your credit, and eventually, you will realise that the goodies that come with the card are not worth ruining your Credit Score.
Additional Reading: Why Your Credit Score Isn’t Improving
Being A Guarantor For Someone Else’s Loan:
Think twice before you agree to be a guarantor for someone else’s loan, regardless of whether the person may be a close relative or your best friend. Sure, we understand that you trust your near and dear ones, but when you co-sign a loan, you are effectively shouldering the responsibility of paying back the loan in case the borrower is unable to.
This could adversely affect your Credit Score and finances if the person you co-sign the loan for fails to make the required repayments. If you too are unable to repay the required amount, watch your Credit Score drop like a stone.
Don’t agree to be a co-signer unless you are ready to take the responsibility. Considering you are a millennial in your 20s, it is likely that you are just beginning your career and will bank on your savings to get you through tough times.
Additional Reading: Things To Keep In Mind As A Loan Guarantor
Avoiding Credit Altogether
Millennials can be quite extreme at times. Either they avail too much credit or they avail none at all. There are some millennials out there who are too scared to avail any sort of credit under their name.
Unfortunately for them, no credit also means no credit history. And if ever you need a Home Loan, Personal Loan or a Car Loan, lenders will be sceptical to lend you money. So, please remember that no credit isn’t exactly a good thing.
You can use credit to build your Credit Score so that if and when you need to apply for a loan from a bank, they can trust you and sanction the amount that you are looking for.
Additional Reading: All About Your Credit Score
Avoid these mistakes to keep your Credit Score in a healthy state. If you haven’t done so already, now is the time to wake up from your deep financial slumber and take control of your finances.
Whether it’s paying Credit Card bills and EMIs on time, to opting for a credit building Credit Card, there are many ways to improve your Credit Score. And don’t forget to build your savings while you’re at it.
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