Thrifty Thinking: Credit Fumbles

The Credit Fumble is a behavioral cycle where young consumers (late teens/20s), many without the necessary financial education, fall victim to largely avoidable financial mistakes and then spend years recovering ­ some into their 30s and beyond.

 

Now available is CreditFumble.com, a site with dedicated resources and data to help consumers prevent, understand and work through financial mistakes.

 

I had a chance to interview Bethy Hardeman, Chief Consumer Advocate at Credit Karma, to learn more.

 

1. What is a Credit Fumble?

It’s the phenomenon in which nearly 70 percent of Americans, many without necessary financial education, make mistakes in their late teens and twenties that ruin their credit, often spending several years — sometimes decades — recovering. Common mistakes or fumbles include overspending on a credit card, missing payments and defaulting on loans.

Consumers should be aware of this phenomenon, as it affects so many people, but is completely preventable with education.

2. What impact can a Credit Fumble have?

A Credit Fumble can affect one’s quality of life significantly — from the ability to take out a mortgage, car loan or credit card with a good interest rate to getting approved for an apartment lease. Recent research by Credit Karma found that three out of four Americans believe their credit-related mishaps have had a negative impact on their lives.

3. Why is it important to start the recovery process early?

It takes as long as seven to ten years to recover from a Credit Fumble, so it's best to start the recovery process early. The median time it took Americans to pay off their credit card debt from their 20s was between three to five years. Other Credit Fumbles, such as having an account sent to collections or defaulting on loans, can stay on a credit report for seven to ten years.

4. What are some steps consumers can take to start to recover?

Consumers should start by making a solid plan to repay their debt to get their credit on track. By limiting any overspending, they can save money to repay any debts they may have incurred from their fumbles. If a consumer has missed payments, had accounts sent to collections agencies or defaulted on loans, their priority should be to start making payments. Your payment history is the most impactful factor that goes into calculating your credit score.

Moms can also encourage their children to begin building their financial lives positively, right from the beginning. Increased access to financial education can prevent many of these fumbles. Credit Karma is currently implementing programs to break this cycle because we believe there should be an increased focus on preventing past, current and future Credit Fumbles. For example, Creditfumble.com is a great resource for more information about how to avoid or recover from a Credit Fumble.