If You Don't Establish Credit Now You'll Hate Yourself Later

The following is a guest post from Martin of Studenomics. Martin has just released a super-helpful guide that shows you how to completely conquer credit before you hit 30. You can’t live life on your own terms until you crush your credit card debt and get ahead of the game.

“The most important thing for a young man is to establish credit – a reputation and character.” — John D. Rockefeller.

We all know that we need to establish credit and create a budget. This is the sort of advice that’s very easy to hand out. We all have that friend that tells us to build credit or to create a budget. Why should we even bother with following this advice?

Do you know why you need to build credit? I honestly didn’t until I started writing about the topic so don’t feel too bad just yet. Let’s look at what I learned about why you need to establish credit in your 20s…

Your pockets will feel it.

When you go to apply for a car loan or home mortgage your interest rate will depend on your credit score. Even 1% on a home loan can impact your pockets by thousands of dollars over the duration of the loan. How much more money will you spend on a home mortgage with a poor credit score?

According to Ramit Sethi’s book, I Will Teach You To Be Rich, on a $200,000 30-year mortgage the difference between 4.384% and 5.973% is $70,560! Yes you read that correctly. That’s over 70 grand more. You could’ve got yourself a nice summer ride with that money instead of blowing it on interest. You could also use that money to pay down your mortgage quicker saving you even more money. All that money because of a credit score. It’s amazing when you think about it from this perspective.

Why does your credit determine your interest rate? Let’s look at it from this point of view.

You have lots of money saved up. You have two friends that are looking to borrow money. One friend, Steve, has only asked you for money once. When he did he returned the money within a week and bought you a coffee just to show his appreciation. In your mind Steve has great credit with you.

On the other hand, you have a buddy, Josh, that has a history of borrowing money from friends. You’re not even sure that you’ll ever see this money again. You know that he won’t even really appreciate your gesture. You’re hesitant to loan Josh the money because he has poor credit in your opinion.

Now on the same day both Steve and Josh come to borrow money from you. You tell Steve that it’s going to cost him a dinner and you expect the money back within 4 weeks. Josh (the dude with poor credit) doesn’t really agree to any strict terms. You don’t even want to loan him the money. He begs and pleads and even gets his father to co-sign the loan. When you finally do agree you tell him that you expect 10% on top of the loan just so that you ensure you’ll get your money back.

This is a simplified example. The general message is accurate. The person loaning you the money wants to know that they’ll get their money back. If you have excellent credit they’ll trust you. If you have poor credit and a history of poor decision they’re going to charge you a higher interest rate to ensure that they get their money back. It really is that simple.

You can live in the fantasy world and say that you shouldn’t buy a home or a car until you have 100% of the cash saved up. The reality is that very few of us will actually do this. Most of us will end up with a home mortgage or a car loan. If you don’t start building credit now you’re going to suffer by getting a higher interest rate.

Your employer will care.

A credit score is a tangible number that potential employers look at. For better or worse, it is what is it. You can complain about this all that you want, but your whining won’t stop from potential employers from checking out your credit score. The justification that I heard is that an employer will want to see if you’re reliable. Since so much of your credit score is based on how reliable you are with money it shows them if they should trust you or not. Another common reason that an employer will care about a credit score is that it’s just a filtering system when there are many candidates applying for the same gig. You don’t want a lack of credit to prevent you from getting that dream gig.

Now you know why you need t build credit now if you don’t want to hate yourself later. The great news now is that moving forward you now have an incentive. You can begin to make moves in the right direction. Good luck to you!

If you enjoyed this guest piece, then don’t forget to grab your copy of Martin’s new guide.


  1. I recently posted how bad credit results in paying 1000s of dollar more towards mortgage. A good credit is important for almost all loan related matters. My friend and I both bought a new car almost at the same time this year. I got 0% Toyota financing where as, my friend is paying interest on the same financing.

    • It’s funny how it works. The few percent will add up and your friend will notice the difference on the car payments. Thanks for sharing your story.

  2. Very true. Credit determines a lot of things and we need to learn to build up credit. I like using credit cards because I know that they will be reported. Unfortunately, renting isn’t always reported by the landlord. Good luck with your new book. Sounds like a great one!

  3. Thank you @Sun for beating me to it. I’m so tired of these articles intent on spreading false information in hopes of enslaving yet another generation to debt.

    I’d change the title of this article to If You Don’t Establish Credit Now You’ll Be Forced to Live Within Your Means Later. And Who Would Ever Want to Do That?

    After all no one wants us to know the true secret to wealth in America>> http://tinypic.com/r/zlp2du/7

  4. Piffle. I didn’t have credit cards until I was in my mid-20’s. I never have had a car loan (I by cars for cash, even new ones), and yet I had no problem buying a house in CA or getting an excellent job. My credit score (the one time I bothered to look at it, when I refinanced) was over 800.

    This country relies far too much on credit, and the mania for what your credit score is completely deluded IMO. Far better to establish a solid savings program, and a tight budget. Credit is a useful tool, but not core to one’s financial health in any way.

  5. Oh yeah – and “higher interest rate” on mortgage. Maybe, but since I paid 30% down and am paying it off far faster than I need to, then the incremental difference is incidental. Again, credit is of far less value to me than other parts of my financial picture – namely overall savings, net worth, and living below my means.

  6. I am embarassed to be “reminiscing” — it makes me feel over the hill- and I swore I’d never say “I REMEMBER WHEN>>>”

    -HOWEVER, As a 58 year old, I do not recall ever having to “build up credit” when I was a young girl about to be married. All we needed to do was be able to qualify for a reasonable mortgage . And that meant saving up for a down payment and buying a VERY small house!! (On our youthful income!) And I want to remind folks who don’t remember the pre-women’s right days– until 1973, the WOMAN’S INCOME DID NOT COUNT when qualifying for a mortgage!!!! ( We were bound to get barefoot and pregnant and drop out of the workforce!) Actually, that is exactly what happened in my case..no WAY I was gonna work and let some stranger raise my kid!!

    There were no credit cards yet. CAN YOU IMAGINE? There WAS “lay away” so when my son was small I put some toys on layaway for christmas but you didn’t get them till it was all paid up! (Dec. 24 in some cases!!!)

    I admit, we have credit cards now, but no debts on them.We financed a car here and there. We made more money and bought bigger houses as income allowed but we NEVER let “credit card offers” or realtors talk us into more expenditure than our income supported.

    it seemed simpler then! We didn’t all aspire to live like people in Hollywood!!!!!!!!

  7. Article states: “You can live in the fantasy world and say that you shouldn’t buy a home or a car until you have 100% of the cash saved up. The reality is that very few of us will actually do this.”

    This is exactly what is wrong with this article – and this country. The idea that buying a car for cash is an impossible dream beyond all but the most wealthy is totally crazy. Crazy.

    No one in my family has ever had a car loan. Not me, not my parents, not my brother who earns minimum wage. We buy what we can afford. We save up for cars, whether it is a $3K beater, or a $20K new car.

    Why couldn’t one “actually do this”? If you can afford a car payment ($200? $400? How much a month are they?), then you can afford to put that money aside to save and buy a car for cash. My first car was $2500 (saved from working). I then drove that and saved for the next eight years to buy my next car, which was new and bought for cash. I have been saving 14 years now for my next one. Over the course of my life I will spend FAR less on cars than someone who just accepts that they should get a loan and thinks it’s impossible not to do so.

    • Have you heard of the Marshmellow Experiment? http://www.youtube.com/watch?v=xNvvL9j_SIs

      I think many of us a so present oriented, we want it now. Those who can be patient and wait for the future are better off. Why pay the bank all this interest when you can keep that interest for other goals in your life.

      I would everyone would you rather have a bank steer your financial destiny or do you want to be able to steer your own financial future?

  8. Rockefeller died in 1937 he didn’t have a credit card or score, that long dash in there tells us that the credit he is referring to is “a reputation and character”

  9. I live a cash system. I have a few cards in my life but never held a balance.

    I was able to buy several houses with almost no credit but simply being liquid.