What you need to know about your credit score when you’re in your 20s and 30s

Convincing you to add yet another credit card to your wallet is a lot like online dating for banks — if they send out enough offers someone is bound to bite.

“It’s like Tinder,” says Chantel Chapman, founder of Holler for Your Dollar and the Financial Fitness Coach at Mogo, a Canadian-based financial services company. “Some people say their Tinder strategy is just swipe everyone and hopefully someone bites. Banks will heavily push, push and say ‘you’re pre-approved’ hoping someone gets into debt because that’s where they make money.”

Chapman has been working in financial literacy for over five years and has found, while working as a mortgage broker, that most young people don’t know the first thing about credit or how to use it to their advantage.

“There’s a big lack of knowledge on a lot of sides. Millennials grew up watching the economic downturn and that has impacted their behaviour with credit,” she says. “Some millennials are even afraid to go near credit, which for credit scores is not a good thing.”

Chapman says many people in their 20s and 30s view credit cards as extra spending money, which is the wrong way to look at credit vehicles and can lead to dangerous debt.

“That’s the biggest thing millennials need to understand — this is not your own money, this is borrowed funds. It’s kind of like that principal of saving and budgeting, you always should spend less than you make, and that seems so obvious, but people don’t get it.”

Chapman says there are a few key pieces of advice that people in their 20s and 30s should heed when learning how to manage their credit scores:

Create a credit history

Chapman says a lot of young people are afraid to have credit cards because they’re nervous about accumulating debt. Having no credit history can be detrimental when you’re looking at taking out a loan or renting an apartment, so creating a credit history is an important first step in building up a good score.

“The credit score algorithm really puts emphasis on how long you’ve had credit for,” she says. “Not only does the credit bureau care about that, but lenders care about that. So if you’re going to get a loan, for example you’re going to get a mortgage, you have to have two years minimum reporting on credit history and you have to have a minimum of at least $2,000 credit limit over those two years.”

View credit cards as a tool and not extra cash

“Credit cards are a tool to build up your credit score,” says Chapman. “Your credit score is basically your financial reputation on paper. Don’t automatically say ‘I don’t want to be riddled with credit card debt, so I’m not going to have any credit products’ because that’s not a good decision for your score. You’re not able to build history if you’ve got nothing to report on.”

Chapman advises using a trick she calls the Netflix and Chill Loop to help people easily build up their credit score.

“Take your Netflix account and pay it every month with your credit card, so you automatically pay that. Then you take your bank account and you have your bank automatically pay that same payment on your credit card. That’s creating a loop, so you can just chill while your credit history builds. But then take that credit card and leave it at home, don’t use it. Just let it build the credit history.”

Credit check yourself

Chapman says people should do credit checks on themselves, so they know where they stand. Are there activities on your card affecting your score? Is your score low because you haven’t built up enough credit? You don’t know unless you check.

“There’s different things you can look for, like do I have any collections on my credit bureau? A collection would be if you owe any money to a third party. I used to be a mortgage broker and I worked with a lot of first time home buyers and one of the most common things I’d see on credit bureaus would be collections from Fido, Rogers, or Telus. Paying off your collections will increase your score.”

Never miss a payment

Missing payments can seriously harm your credit score. It doesn’t matter whether you owe a little or a lot, to the credit bureau a missed payment is a missed payment.

“If you miss a $400 payment or you miss a $4 payment, the credit bureau algorithm looks at it as equal,” says Chapman. “This happened to me, I had a Bay card and I thought I’d paid it off because I wasn’t looking at bills, I was just making payments, and I didn’t really remember, so I underpaid it by $8. I had an $8 payment on my credit card with a minimum payment of like $4 and I missed it. Then my credit bureau says 30 days late on that payment. I spoke with Equifax, one of the credit bureau companies, and I asked them do you weigh it the same and $4 or $400, if you miss a payment, they don’t say ‘oh this one is worth more than this one’ it’s just ‘we’ve seen you missed a payment.”

Learn what your utilization ratio is and use it

Chapman says when it comes to your utilization ratio the rule of thumb is always to take your credit limit and create an imaginary cap that leaves you with a 30 per cent buffer. Setting a buffer keeps you safe from going over your credit limit, which can negatively impact your score.

“Let’s say your credit has a $1,000 limit, you never ever go over $700. Always leave a 30 per cent buffer, so it’s like you have an imaginary limit,” she says. “If you’re over that 70 per cent a really quick way to increase your credit score is to make a payment to make it below that mark and that should update your credit score in about 60 days. Utilization is a big thing, make that payment and that will increase your score quickly.”

Transfer your debt to a personal loan

If you’re in credit card debt and can’t be trusted to make payments to bring down the debt, Chapman says a personal loan may be easier for you to manage and be better for your credit score overall.

“If you can’t be trusted with credit cards because they’re convenient, they’re re-advanceable, transfer your balance over to a personal loan because a personal loan is set monthly payments and as you pay down the principle you’re not allowed to re-borrow that money out the next day.”

Diversify your credit

Chapman says it can be good for your credit score to have more than one kind of credit vehicle and being able to manage multiple payments looks good on credit reports.

“You want to have at least two credit vehicles, so if you don’t have a student loan or a car loan, you probably want to have two credit cards because it shows you can manage more than just one,” she says. “But the type of credit vehicles on your credit bureau can also lower your score because the algorithm looks at types of credit and credit cards are more risky than loans. So let’s say you had two credits cards and one loan versus someone who had two loans and one credit card. Two loans and one credit card would be better for the score.”