Saturday, April 27, 2019

Build Credit History as a Young Adult

Build Credit History as a Young Adult

Many young adults face a unique set of circumstances that causes them to struggle when trying to build credit history. Inexperience with finances, loans to be paid off, social pressure, a lack of financial planning; all of these are factors that will lead today’s young adults down the path towards a poor credit scores. It’s why you, as a young adult or even otherwise, need to build credit history. There are long-term ramifications of having bad credit, and exercising a bit of restraint today will go a long way towards helping you in the near and distant future.

It is unsurprising to see that a Harvard Professor in behavioral finance, David Laibson, conducted a study that ascertained one simple  fact. Most of the people that get lumped with surprise penalties and fees are newer cardholders that haven’t read the fine print and don’t know what to expect. And increasingly, young adults are falling prey to these “gotcha” charges and it is acting as a hindrance in their efforts to build credit history. Ironically, the beneficiary of this laxity on the part of young adults are more experienced customers for whom a lot of the subsidies are provided by the credit card company thanks to the penalties they impose on others.

Again, a theme that is common to all young adults is that of student loans. Make no mistake about it, it can be an absolute killer. I know of students that have just graduated and are lumbered with something in the region of $200,000 by way of student debt. That is an insane amount of debt to have as a young adult and it is again a major impediment for looking to build credit history. Peter Thiel, a co-founder of PayPal, recently went so far as to create a fund that offered $100,000 for a total of 20 students who were willing to drop out of school and launch their own companies. Peter believes that education is a bad investment in today’s economic climate, and there are many students who would gladly agree with him. It is a theme that resonates strongly amongst a population of 20 somethings that are lumbered with debt even before they get a job.

It takes decades to pay off that $100,000 student loan, and it is inescapable even if you file for bankruptcy. Then there are also the worries of social pressures and undue financial buoyancy. Being free from a social and career perspective, many young adults will spend freely and sometimes irresponsibly on automobiles, social events, entertainment, clothes and anything else remotely materialistic. Young adults that start out with a more limited credit history need to understand the need to build credit history. Maybe not now, but sometime in the future their credit will come under closer scrutiny and that is when the indiscretions and mistakes of their youth will come back to haunt them. That is why they (and indeed everyone) needs to work on developing a good credit history, because credit mistakes can echo for years and years into ones lifetime.