In your 20s, managing your finances may be an entirely new concept. For instance, you might be learning how to budget for the first time while navigating the beginnings of your career or figuring out how you’re going to pay down student loans.
Once you settle into your 30s, it’s time to start taking a closer look at your financial picture, particularly where your credit score and debt are concerned. While credit is a helpful tool for improving your score if used wisely, it can just as easily lead to debt if not.
If the big 3-0 is on the horizon or you’re already a part of the 30-something crowd, here’s how to make sure you’re on the right track when it comes to your credit score and debt.
Understand Why Your Credit and Debt Matter
It’s easy to think of a credit score as just a three-digit number, but it carries more weight than that. Your credit score is essentially a yardstick that lenders use to measure how financially responsible you are. A high credit score tells lenders you know how to pay your bills on time and you keep debt in check. A low credit score conveys the opposite message.
Here are some numbers to put it in perspective. According to Credit Sesame’s internal data from a subset of almost 8 million members, Millennials have the lowest average credit score of any generation. Thirty-somethings who are closer in the 620 neighborhood would be wise to push their scores closer to the 670 mark and beyond.
Why is good credit in your 30s so important? It’s simple. Your credit score either opens or closes doors when the time comes to borrow money.
If you’re paying down student debt, for example, a private lender will check your credit if you apply for a refinance loan. A credit check is also par for the course when home buying is on the agenda. The better your score, the better the odds of getting approved and scoring a low-interest rate to boot.
At the same time, you should also be mindful of how your debt affects your score. One of the most significant things that affect your score is your credit utilization ratio. Using up a big chunk of your available credit drags your score down. Ideally, you should be use 30% or less of your credit line at any given time if you want a healthy score. That’s true whether your credit limit is $500 or $50,000.
What Should You Aim to Accomplish in Your 30s?
When you’re ready to get a grip on credit and debt in your 30s, the toughest question may be where to begin. In other words, which one do you work on first? And what goals should you set?
If you’re stuck on what to cross off your to-do list first, here are some pointers to get you started on the best ways to build credit:
- Get in the habit of paying your bills on time. The most important thing you can do to for your credit score in your 30s is pay your bills on time. Payment history makes up 35% of your FICO credit score, which is the scoring model most lenders use to make approval decisions. It’s a huge part of your VantageScore, too. If you can get in the swing of making timely payments, that alone can work wonders for your score.
- Chip away at your credit card balances. If you took on some credit card debt in your 20s, paying it down or eliminating it altogether is a goal to work towards. Again, the more available credit you’re using, the worse it looks for your credit score.
- Wipe out as much of your student loan debt as possible. The Institute for College Access and Success (TICAS) puts the average student loan debt at $28,950 per borrower. Hopefully, by now you’ve made a decent dent in what you owe if you have student loans but if not, it’s time to fast-track paying it off. Look into consolidating or refinancing if a high-interest rate is making it tough to make headway.
- Leverage your work history to qualify for higher credit limits. Besides paying your bills on time and keeping your debt balances low, increasing your credit limits is another way to boost your credit score. If you don’t take on new debt, your utilization rate will go down when your credit limits go up. If you’ve got several years of work history under your belt and you’re making a good income, use those qualifications to your advantage and request a bump in your credit limit.
Credit and Debt Don’ts for Your 30s
Aside from finding ways to positively impact your score and reduce your debt, you should also be on the lookout for potential pitfalls. Here’s what 30-somethings should avoid:
- Don’t rush to shut down old accounts. Fifteen percent of your FICO score is based on the average length of your credit history. Though ‘tidying up’ your cards may seem like a good idea, closing down older accounts can actually cause your average file age to go down, knocking points off your score in the process.
- Don’t go crazy applying for new credit either. Ten percent of your score is based on how often you apply for new loans or lines of credit. Each inquiry can shave a few points off your score so you’re better off applying only when it’s really a necessity.
- Don’t carry a balance on your credit cards. Credit cards are convenient when you need to make a purchase but they can cost you big money if you carry around debt. Over time, interest charges really add up, and can greatly increase the overall amount of money you have to pay back. Pay your card in full each month to avoid fees and to keep that money in your own pocket instead.
- Don’t ignore your credit report. Errors on your credit report can damage your score, but if you don’t check your credit regularly, you may not even realize it’s happening.
- Don’t wait to get help if you’re struggling with debt. If you’ve gotten in over your head and credit cards or student loans are taking a serious toll on your wallet, you don’t have to let yourself drown. Reach out. Call up your creditors or go one step further and get help from a certified credit counselor. Either is a smart move when your credit rating is on the line.
“Good” Debt vs. “Bad” Debt: What’s the Difference?
One thing that can be confusing is the divide between good debt and bad debt. Generally, good debt is something that’s attached to an asset that grows in value, like a home. You can also think of good debt as an investment. For example, student loans are characterized as good debt because the idea is that you can use your education to land a job that pays well.
Bad debt, on the other hand, is something that doesn’t really have any intrinsic value. Credit card debt and payday loans usually fall into this category. The logic here is that you’re paying interest and fees to have the debt but you’re not getting anything of value back.
Keep in mind that many financial experts consider all debt to be bad, but that some kinds of debt are worse than other kinds.
Ultimately, whether a debt is considered good or bad, it’s all money you’ve borrowed for one reason or another. In your 30s, it may be more helpful to think of your debt in terms of what the return is. If you’ve got credit card debt but you’re paying it down and improving your credit score in the process, for example, that’s a good outcome. In the end, it’s really about your perspective and what your goals are for managing credit and debt in your 30s and beyond.
Rebecca Lake is a financial journalist at Credit Sesame. She has a Bachelors in Political Science from the University of South Carolina. She covers the intersection of public policy and personal finance.