Don’t be like Ryan Lochte — consider getting a credit card before you’re 32

Ryan Lochte, the 12-time Olympic medalist in swimming and current “Dancing With the Stars” contestant, revealed in an interview with New York Magazine this week that he didn’t have a credit card until very recently. He is 32. When asked why he didn’t have a card until now, he said, “I don’t know. Everything was like…automated. My entire life.”

Lochte has been known to make some questionable decisions and credit experts say this is one of them. “Ryan is certainly a world class swimmer, but I think he probably waited too long to get started with his credit,” said Matt Schulz, a senior industry analyst at the credit-card website CreditCards.com.

The best time to start building a credit history is “as early as possible,” said Sean McQuay, a credit card expert at the personal finance website NerdWallet. It may take Lochte, and others who wait to establish a credit history, several years to do so, which is inconvenient for those trying to qualify to buy homes and cars or to open a credit card with desirable perks and terms.

How creditworthiness is determined

Although age isn’t considered when determining an individual’s credit score, the length of his or her credit history is. For the widely-used FICO score, the credit score named for the credit risk company Fair Isaac Corporation, length of credit history makes up 15% of an individual’s score. (A perfect FICO score is 850 points, and a score of 800 or more is considered “exceptional” credit. FICO considers scores between 670 and 739 to be “good” and scores between 740 and 799 “very good.”)

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Payment history counts for 35%, amounts owed for 30%, and 10% is made up by “credit mix” while another 10% is new credit, or a measure of how many new credit accounts someone has opened recently, which may indicate some risk. (“Credit mix” is FICO’s term for the combination of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans one has. Other credit companies including Equifax and Experian consider similar information.)

Don’t miss: How to spot a predatory credit card

Above all else, consumers should be concerned with paying their bills on time and in full, and should aim to be taking advantage of less than 30% of the total available credit available to them at a given time, said Ethan Dornhelm, the senior director of scores and analytics at FICO.

There are several free tools consumers can use to check their credit scores, with no penalty to their score; Dornhelm recommended MyFICO.com and AnnualCreditReport.com.

Responsible spending will reflect well on any consumer, regardless of age, said Nancy Bistritz, the director of public relations and communications for Equifax. As a result, even someone with a relatively short credit history could have a strong credit score, Dornhelm added. “If that consumer has established credit accounts and they’re responsibly managing those accounts, it’s certainly within reason they could be scoring in the mid-700s and even higher, which would qualify them for just about any credit they might be looking for,” he said.

“The key to credit is to only spend money you have. In essence, treat your credit cards just like cash or a debit card,” said Sandra Bernardo, Experian’s manager of consumer education.

Read: 5 things to know to improve your credit score

How to build your credit

Opening a traditional credit card isn’t the only way to establish a strong credit history. Consumers just starting out trying to build a history may not even qualify for some well-known credit cards; or, others may not want the responsibility of having a credit card, which may tempt them to overspend, Dornhelm said. Spending too much and being unable to pay bills would be detrimental to credit score, which would be a good reason to wait before opening one, Dornhelm said.

“Getting a credit card is the easiest way to build your credit, and if you shy away from that, it can hurt you in the long run because folks with crummy credit cost themselves thousands over their lifetime because of high interest rates on credit cards, mortgages and cars,” Schulz said.

President Barack Obama signed the Credit CARD Act in 2009, which made it harder for consumers under 21 to sign up for cards, and harder for lenders to market cards to young adults. Still, using one responsibly can not only build credit, but also provide benefits including cash back and travel rewards.

Young adults in the U.S. have recently been more resistant to opening and using credit cards than in previous years; some 64% of millennials Experian surveyed this year said they thought credit cards were dangerous. Experian surveyed about 1,000 millennials.

In general, Americans have used credit cards less in the past several years, according to the polling firm Gallup. On average, American adults each had 3.1 credit cards in 2001, and in 2014 they had 2.6. During that time, the number of Americans with zero credit cards rose from 22% to 29%.

Polling firms have found different answers on how many millennials have a credit card. According to Experian’s survey, 67% of millennials have at least one credit card; but a similar survey by personal finance company Bankrate in 2016 found that just 33% of adults between the ages of 18 and 29 have a credit card, and 55% of those 30 to 49 have one. Bankrate surveyed about 1,000 adults in the U.S.

The Federal Reserve has found that over the last several years, young adults have carried lower balances on the cards they do have. In 2007, those under 35 had average credit card balances of $5,800, and those 35 to 44 had average balances of $8,500. In 2013, individuals or families with heads of households younger than 35 years old had average credit card balances of $3,400. Those ages 35 to 44 had average balances of $6,100 and those 45 to 54 had balances of $5,900, according to the most recent data available from the Federal Reserve.

For those who either can’t or don’t want to open a traditional credit card, secured credit cards can be a good option, McQuay said. Secured cards are similar to debit cards, but they allow those who use them to build credit. They require the user to pay a security deposit up front; in return, the user will be allowed to spend up to that limit, while building up his or her credit score. (NerdWallet offers a list of the best secured credit cards.)

Starting early, with some help, is also a good idea when possible. If a consumer has a parent who uses credit cards responsibly and is willing to let him or her be an authorized user on a credit card, or even open a card in a child’s name (whether or not the child is given access to using the credit card) that also helps build credit, Schulz said. (Although Dornhelm pointed out, it doesn’t help as much on one’s FICO score as holding a card in one’s own name.) “Adding someone won’t hurt,” he said, “it’s just not likely to make nearly as substantive a difference.”

Signing up for a credit card with a cosigner (if a consumer has a willing cosigner) is another option, Bistritz said. She also recommended working with a credit union to see what options are available to build credit. Many offer products including secured loans and credit counseling.

McQuay offered some hope for young adults hoping to build their credit history; his sister, who is still in college, just qualified for the American Express AXP, +0.63% Gold card, which requires a strong credit history and offers rewards including double points on flights booked directly with airlines and at U.S. restaurants. She was able to do it by showing consistent income from the jobs she has done while being a student, as well as a history of paying her bills on time. In order to qualify for a reputable rewards card, your income “doesn’t have to be huge,” he said.

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Published at Tue, 18 Oct 2016 17:17:03 +0000