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The 5 common credit mistakes you should avoid in your 20s

It can be hard to get your finances together in your 20s, when you're working an entry-level job and have many competing priorities.

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For many young professionals and new graduates, the years between age 20 and 30 are all about working toward establishing the life you want. Finally, you're ready to start focusing on your career, making more money and planning for major life milestones like getting married, going to grad school or opening your own business.

Yet, we're often less prepared for the financial decisions that come along with such events. Most of us face competing priorities — juggling student loan debt, a desire to have a full social life, the pressure to invest in our future — all while trying to make ends meet on an entry-level salary.

As a result, it's easy to fall prey to a few common — but totally avoidable — money mistakes during your 20s.

CNBC Select spoke with Stash Wealth founder and CEO Priya Malani and Nashville-based financial advisor Brenton D. Harrison to get their best advice on how to avoid these common credit card mistakes so you can stay focused on your goals.

The most common credit mistakes people make in their 20s

  1. Spending without a plan
  2. Using debit over credit
  3. Waiting to establish credit
  4. Not understanding key terms
  5. Getting store cards on a whim

Mistake #1: Spending without a plan

The most common yet avoidable credit mistake is buying things with a credit card that you can't afford to pay off in full when the balance is due.

"I think that ruins a lot of people's relationships with credit from the very start," says Harrison.

Without learning at a young age how to responsibly use a credit card, 20-somethings regularly fall into a cycle of debt, using their cards to pay for expenses upfront without a plan to pay off the balance.

But it doesn't have to be this way. 

"If you manage your finances so that you're buying things with credit that you can afford to pay in full, credit cards can open up a number of advantageous doors for your financial life," Harrison says.

These perks include cash back, travel rewards and more.

To get in the habit of responsible credit card use, Harrison suggests asking yourself one simple question every time you are about to make a purchase with your card: "When this payment date comes ... am I going to be able to pay it in full?"

If the answer is no, consider whether your purchase is still worth the interest fees you'll pay. 

Mistake #2: Using debit over credit

Often, younger consumers rely on their debit cards more than a credit card for fear of falling into debt. But in actuality, credit cards are more secure when it comes to fraud protection, and they give you the ability to earn cash back on everyday expenses such as groceries, streaming and gasoline.

Using a credit card is also a great way to build credit, whereas debit cards have no impact on your credit score.

"Just make sure you don't use a credit card to spend more money than you have," says Malani. Many checking accounts charge overdraft fees or decline charges when you don't have the cash. But with credit cards, you can spend up to your limit, regardless of whether you can pay your balance in full at the end of the month.

If you're nervous about overspending with your credit card, you can set up account alerts so you'll get an email or text message warning you if you've spent over a certain amount. It's also good to regularly review your account balances so you know where you stand and you can make adjustments to your spending as necessary. 

Mistake #3: Waiting to establish credit

Too many 20-somethings wait too long to establish credit. When you're credit invisible, you could have a harder time renting an apartment and qualifying for personal loans even if you make a good salary and have plenty of cash in your savings. 

Malani's advice for young consumers? "Start with an introductory card and only use it for gas or groceries. Pay it immediately to get yourself in the habit of paying off that credit card sooner rather than later."

As you begin feel comfortable, start using your card for other kinds of spending and automate your payments to avoid a late fee or getting dinged with a missed payment on your credit report.

"An 18 year old with a credit card is stronger than a 30 year old without one," says Malani.

Mistake #4: Getting store cards on a whim

Nearly every retailer tries to get you to sign-up for a store card at checkout with the promise of a big same-day discount. These cards are usually pretty easy to qualify for, which makes them a popular choice for young adults opening their first credit cards. Saving money while establishing credit might seem like a win-win situation. However, you shouldn't apply for one on a whim.

More often than not, store cards come with high APR and deferred interest, if there is a promotional 0% financing period. And you won't really get a discount on your purchase if you end up missing a payment or not being able to pay your balance in full. 

Not to mention, you might not want that store card in a year or two.

"Our consumer tastes change as we get older," Harrison says. When you decide to cancel or close a store card, you will see an impact on your average credit account age. It might also lower your overall credit limit, making it harder to attain an ideal credit utilization rate.

Store credit cards can be a good way to start building credit, but when possible choose a card you can see yourself using for a long time. co-branded store card might be a good choice if you qualify, since they tend to offer cardholders better perks. For example, the Capital One Walmart Rewards® Mastercard® offers 5% cash back on Walmart.com purchases, 2% cash back on restaurant, travel, in-store Walmart® purchases and Walmart and Murphy USA Fuel Stations purchases and 1% on everything else. 

Meanwhile, a versatile cash-back credit card like the Blue Cash Everyday® Card from American Express can help you earn points at U.S. gas stations, U.S. supermarkets and U.S. online retail purchases and there are fewer limits on where you can use the card to earn bonus rewards. 

Mistake #5: Not understanding key terms

When you sign up for a new credit card it's easy to overlook the terms and conditions, but failing to review and understand key credit card terms can lead to costly mistakes. 

Take time to learn how your billing cycle works, what a grace period is and the difference between the statement balance and current balance. Make sure you know how much you're being charged in interest (known as APR) and how your card issuer calculates your minimum payment

Bottom line

Taking the time in your 20s to learn about personal finance and take control of your money can set you up for success in your 30s and beyond. By establishing good habits at a young age, you can avoid wasting money on interest charges or late fees — money that can be better used to build up an emergency fund, save for a dream vacation or spend on something you really care about. 

Establishing good credit early will also help you prepare to bigger milestones, like applying for a mortgage, a car loan or a business loan.

The free credit monitoring service CreditWise® from Capital One includes a credit simulator tool to let you see what the potential impact a specific action might have on your credit profile. The options you can simulate include taking out a personal loan, using a certain amount of your available credit, paying off your balance, getting a new card, doing a balance transfer and more.

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Information about the Capital One Walmart Rewards® Mastercard® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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