Take a look at some of the most expensive blunders millennials make when it comes to credit — and what can be done instead.
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.
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.
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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 falling behind in payments. 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 their total available credit.
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 Bankrate.com.) And in some cases, consumers who miss payments may face higher interest charges, McQuay says.
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 Bankrate.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 of millennials have requested a lower interest rate, compared to 19 percent of all adults.