Written by Alayna Okerlund | Last Updated February 24th, 2020Alayna Okerlund is a finance-focused Senior Content Strategist at BestCompany.com. Over the past three years, Alayna's finance-related research has helped readers feel more financially confident. She has worked with several reputable experts and has provided content for a variety of well-known publications like Forbes, Reader’s Digest, Lifehacker, and more.
For most people in their early to mid-twenties, life can be challenging. After all, by the time you turn 25, you’re expected to have life figured out — where you live, what job you have, what car you drive, etc. Probably one of the most important factors of life that you are expected to figure out by the time you are 25 is credit.
According to a recent poll conducted by Branded Research, 68 percent of those between the ages of 18-24 said they currently have a credit card they use regularly. That number increases to 78 percent for those in the 25-34 age range.
The poll results also showed that approximately 41 percent of those who are 18-24 who do have a credit card, used their credit card primarily to build up credit. Meanwhile, 35 percent of those in the 25-34 age range used their credit cards to primarily earn rewards and only 29 percent of them used their credit cards to build up credit.
If you are approaching your mid-twenties and still have a ways to go to establish a strong credit foundation, you should know you’re not alone. Here’s what the experts say you should know about credit by the time you turn 25:
Why credit is important
“Your credit can affect your everyday life far more than you might think. Credit scores are instrumental in helping lenders determine your interest rates, and your likelihood of being approved for credit cards also depends on your credit history. What’s less commonly discussed is how negative credit can even affect your ability to rent desirable properties or get certain jobs.” — Sean Messier, Credit Industry Analyst at Credit Card Insider
“By the age of 25, everyone should be aware that their credit score is crucial to set themselves up for financial success because most people typically need to start out borrowing money to get themselves through the early years when cash outflows are high compared to cash inflows. People need to understand that the basis of borrowing money from banks begins with an assessment of their credit score.
Banks typically are highly reluctant to lend money to someone with a low credit score. Additionally, just because someone has a high credit score doesn’t necessarily mean that banks will lend to them. Banks want to see a track record of credit history and that the track record is scored within an acceptable range using the FICO scoring system.” — Michael J Bús, CEO and President of PNW Financial
“Your credit score is the most important factor in your entire financial life. It determines the mortgage rate you’ll pay, the car loan you’ll receive, and whether you’ll get approved for an apartment or credit card. It can literally be the difference between spending an extra six figures over the life of your mortgage or saving six figures.” — Mike Pearson, Founder of Credit Takeoff
“A healthy credit report and score can help you out considerably in the future and save you a lot of money over a lifetime. Credit is used to determine many things that lie ahead, such as auto loans, mortgage, qualifying to rent an apartment, in some cases employment, etc. Maintaining a healthy credit will grant you lower interest rates, lower deductibles, higher credit limits, etc.” — Jacob Dayan, CEO and Co-founder of Community Tax and Finance Pal
What makes up a credit score
“Although they each use their own mathematical formula, the credit rating companies, also known as credit bureaus, base their scores on the same criteria: Payment history, length of credit history, debt to credit limit ratio, number of credit inquiries, and type of credit accounts. Any late payments, collections activity, high account balances, and credit inquiries will lower your score.
The scoring model used, called FICO (Fair Isaac & Company developed the model), will place your score somewhere between 300 and 850. Scores at the high end of the range usually translate into lower borrowing costs.” — Richard Best, writer for Dontpayfull.com
“You can’t win the game unless you know the rules. To get and maintain a good credit score, you have to know how your credit score is calculated in the first place — most people have no idea. Study up on things like payment history, credit utilization, and credit inquiries. Know what goes into your score so you can take action to stack the odds in your favor.” — Pearson
“You should know how your credit score is calculated. Too many people think that their credit score is just some magical number that is vaguely related to how many missed payments you have. While paying your bills on time is certainly a part of your credit score, the whole story is a bit more complicated than that.
There are actually five factors that go into calculating your credit score:
- Payment history: Your payment history — that is, how responsible you've been with paying your bills, especially on credit cards and installment loans — makes up an enormous 35 percent of your credit score.
- Utilization rate: Your utilization rate, or the ratio of your credit balance to your total credit limit, makes up 30 percent of your credit score. Ideally, you don't really want to be carrying a balance on any of your credit cards. If this isn't possible, aim to keep your total utilization of any one card's credit limit to 30 percent. So if you have a credit card with a $10,000 credit limit, do your best to keep your credit utilization under $3,000.
- Length of credit history: Your length of credit history comprises 15 percent of your credit score. There's not much you can do about this credit scoring factor other than to continue to handle credit responsibly, year in and year out, and also make sure that you don't close your oldest credit card.
- New credit: New credit is a factor based on how many loan applications, credit pulls, and new credit accounts that appeared on your credit report in the past six to twelve months. This factor accounts for 10 percent of your credit score. The more loan applications, credit pulls, and new credit accounts that appeared on your credit report recently, the more this "new credit" factor will work against you.
- Credit mix: Credit mix is a factor based on the variety of credit accounts appearing on your credit report. Revolving credit accounts such as credit cards would be one kind of credit account. Installment loans such as a car loan would be another. Like the new credit factor, this factor accounts for 10 percent of your credit score.
Like it or not, the theory here is that if someone has experience handling different kinds of credit responsibly, the more responsible of a borrower they are overall.” — Logan Allec, CPA and Owner of Money Done Right
What affects your credit score
“Your credit score is based more on recent (12 month) history than ancient history. A default on a loan that is more than one year old will not have a significant impact on your credit score.
A lot of people think that old (more than one year) medical collections will keep their score low. The reality is that they can keep your score low if you have not re-established credit. However, if you have re-established credit, old medical collections will not really affect your score. The algorithms don’t even count them against your score unless you have other bad debt. If you have other bad debt, then the medical collections can have a compound effect on your score.
Judgments don’t actually disappear when they fall off your credit report. Judgments can be enforced indefinitely (depending on the state). Many people believe that a judgment will disappear after seven years. While this will come off the credit report, it doesn’t mean that you don’t still owe the money. If you buy a house, a judgment can become a lien on your property.” — Phil Georgiades, Chairman of Federal Home Loan Centers
“Hurting your credit score is easy. Rebuilding your credit score is hard. A single late payment on your credit report will be visible for seven years. It's critical to pay your bills on-time because 35 percent of your credit score is based on your payment history.” — James Garvey, CEO of Self Lender
“[...] a lot of young individuals don't realize just how many things affect credit score. For example, items such as parking tickets, medical bills, cable bills, library fees, and even gym memberships can affect your credit score believe it or not. A lot of millennials just brush these bills to the side not knowing they might come back to bite them later on when they apply for a loan.” — Matthew Ross, Co-owner and COO of RIZKNOWS and The Slumber Yard
How to check your credit reports and credit score
“The Fair Credit Reporting Act requires that all borrowers receive a free credit report from each of the three credit bureaus. It is important to get into the habit of requesting a report from each throughout the year. Order one every three months so you can monitor your credit all year long. Go to www.Annualcreditreport.com and register for your free copies.” — Best
“There are no reasons to pay for a credit report. You can check your credit scores for free with Credit Karma or Credit Sesame.” — Elise Nguyen, Personal Finance and Lifestyle Blogger for Little Seeds of Wealth
How to use a credit card and how to build credit
“Credit cards allow you to build credit history, which is important for your financial health. Having a credit history allows you to take out a loan, finance a car or even buy a house. Establishing a trail shows lenders that you’re able to make payments on a frequent basis. Paying your credit card bills on time will allow you to obtain a strong credit score, apply for items that require credit and receive lower interest rates. Building credit takes time and patience, but it’s worth the wait.
Overspending can lead to a high balance or not enough available credit. Your utilization rate, or the amount of available credit you have, can also negatively affect your score. In addition to your overall balance, pay attention to the amount you have. Make it a rule to keep your utilization rate below 30 percent on your credit card at all times. Maxing out your credit cards or leaving a part of your balance unpaid won’t work in your favor.” — Erin Ellis, Accredited Financial Counselor at Philadelphia Federal Credit Union (PFCU)
“You should know what the credit utilization ratio is and understand that you should only be using 30 percent of the credit you have access to. Many young adults are maxing out their credit cards and don’t understand the damage they are doing.” — Jacqueline Devereux, Credit Expert for SproutCents
“Making only the minimum monthly payment can hurt you in the long run. Making the minimum payment on your credit card accounts will help you avoid late fees, but it has its fair share of consequences. You’ll still accumulate interest, which can cause debt to spiral out of control faster than you might expect. Plus, a high utilization ratio — your balance versus your overall credit limit — can damage your credit scores.” — Messier
“Here are my three rules for young adults who want to start building their credit. Do these before applying for credit.
1. Have a budget in place and use it for at least six months
2. Have a bank account with a debit card and go 12 months without having a purchase denied for insufficient funds
3. Build an emergency savings fund equal to one month of your income
Don’t try to start building credit with the big, national bank credit cards. Start smaller and closer to home. A tire shop, retail store or gas station card is easier to qualify for.” — Todd Christensen, Education Manager at Money Fit and author of Everyday Money for Everyday People
“Credit cards have very high-interest rates because the loans are not secured by any tangible asset. Pay off your credit card debts on time to avoid accumulating interests.
Start working on improving your credit score as early as possible. Bankers and lenders use credit scores to know if you are a good borrower and pay on time. You don't want to miss out on a home you want because of poor credit scores.” — Nguyen
“High-interest rates will make it much more expensive to pay back the money you borrow. So remember, making minimum payments on credit cards is fine, but a big chunk of those payments will be going toward interest, not toward paying back your debt.” — Gerri Detweiler, Education Director for Nav
The bottom line
Credit is clearly important. Your age shouldn’t be the only thing that motivates you to start building your credit, even though you may experience a financial reality check the closer you get to your mid to late 20’s. Facing your credit head-on at a younger age can help you in the long run. Work on building good credit and fixing your bad credit before you hit your 25th birthday, so you’ll have one less thing to worry about.