When you're young, it can be hard to know how to manage your money. No one is teaching classes on it, so much of what you learn is largely by trial and error -- mostly error. Millennials are making big mistakes when it comes to managing their money, but for the most part it's innocent, naive mistakes. So how can you avoid common mistakes that Millennials are making with their money that's tanking their credit rating?
Not Realizing How Serious Unpaid Bills Can Be
Pretty much every expert we spoke to mentioned that Millennials often didn't know just how serious unpaid bills could be. Scott Mazuzan, FCP and private client advisor with F.L. Putnam Investment Management Company of Portland, Maine, cited "orphaned debts" as one problem. "Millennials rent and relocate often," he says. "This means that, despite their best efforts, bills can go missing and end up in collections." He advises that you avoid this by making sure that you forward all your mail and proactively follow your outstanding bills.
"Late or skipped payments, even in small amounts, are reportable to credit agencies and can damage credit scores quickly," Mazuzan says. The solution to that, he says, is to maintain a diligent schedule of bill paying that coincides with your payment schedule.
Not budgeting is one of the biggest mistakes anyone can make and it comes up commonly across demographics. However, Leslie Tayne, a debt lawyer based out of New York, says that it can impact Millennials especially hard. "Many times they're either not budgeting at all or not factoring in all their expenses," she says. No matter which case it is, not budgeting or not factoring in all of your expenses can make you miss payments, which can make your credit score tank. Track your spending over the course of a few months, make a budget, stick to it and don't be afraid to change it if and when your circumstances chance.
Part of budgeting, according to Tayne, is setting up automatic debiting. This allows you to spend the money on the things you need to spend on before you spend on the things you want to spend on. Barring automatic payments, putting alerts on your phone to ensure that you're making payments on time can keep you from falling behind.
Finally, Tayne says that one of the main problems Millennials have with budgeting is that they fail to plan for day-to-day expenses. For that purposes, she says, the best thing to do is to plan out how much money they're going to use in a given week, then stick to that amount of money, no matter what.
Not Using Credit Properly
Mazuzan says there are two parallel pitfalls that Millennials fall into when using credit. "Many are distrustful of financial institutions and any credit utilization, coming of age in an era of financial crisis and corruption," Mazuzan says. To that end, they just don't use credit at all, which naturally precludes building any kind of a credit rating at all.
On the other hand, some Millennial consumers "chase offers," meaning that they apply for every card under the sun, transferring balances from one card to another. "Credit agencies look at how often you open and close accounts," he says, adding that they also look at how long accounts have been open. He says that the main thing is to open one card with a good rewards program, good customer service and a solid APR, then stick to that one card alone for at least a year.
Tayne also points out that having too many credit can be a risk. She says that three should be an upper limit on the number of cards a person has. "Credit cards should not be considered as a source of income," she says. She recommends one card for emergencies, one card for groceries and/or gas for the rewards points and another for your bills. The best thing to do is to pay all of these off every month.
Most of keeping your credit on point is managing your money on a day-to-day basis and paying your bills on time. If you can manage that, you won't have much trouble getting your car or home loan a few years down the line.