Millennials may say they don’t want credit or that they have no worries about credit, but in reality – because of how the world works, everyone needs to be actively concerned with their credit and credit scores.
However, millennials simply use credit differently than previous generations. The problem is that they just can’t get credit because they have some of the worst credit scores, according to some of the major credit reporting agencies. This means that, when a millennial does need credit, there is a need to figure out how to improve credit scores.
A generation of subprime candidates
For example, TransUnion found that 43 percent of borrowers ages 18-36 have a credit score of 600 or below, making them subprime candidates. When someone falls into the category of subprime, companies will most likely turn them down. That low credit score is often a signal that they will not adhere to the loan terms and make the payments.
The result is more credit card or loan rejections, fewer choices, and much higher interest rates. A low credit score can also stand in the way of leasing an apartment or even getting a job. Plus, insurance rates will be more than if the millennial’s credit score is good or excellent. As many millennials are becoming entrepreneurs who want to start their own businesses, they may find that their personal credit score is stopping them from getting business lines of credit.
The invisible debtor
A major part of the problem is that millennials just don’t use credit as often as other generations. According to the Consumer Financial Protection Bureau, 26 million Americans are considered “credit invisible” with no credit history with a major credit reporting agency. This invisibility is becoming such a major problem among this generation that credit reporting companies are now considering developing a new set of measurements to determine the credit scores of millennials.
Experian found that this age group is accumulating less credit and taking longer to establish any credit lines — except for auto loans — which other generations have established at an earlier age. “Having no credit history can be as detrimental, or worse, than having a bad credit history,” says Howard Dvorkin, Chairman of Debt.com.
Action plan for improving your credit score
There are some pretty simple ways to improve your credit score that millennials can do:
- Make payments on time. You are telling companies you understand that you must meet a deadline and are capable of doing so.
- Establish a longer credit history. The length of time will be able to uncover patterns in spending, payments, and overall financial maturity.
- Put some normal purchases like gas or groceries on a credit card and then pay it off rather than leave a credit card unused. You are merely putting these purchases on a credit card to show companies that you have the potential to use credit – and do so responsibly.
- Keep credit card balances low – between 10 percent and 30 percdent of your available credit. You will then reassure companies that you will not overspend and not be able to meet your obligations.
- Tap into revolving and installment credit accounts. These types of accounts indicate how you can handle different types of debt.
- Get rent payments reported to credit bureaus. This can provide an additional source that illustrates your credit responsibility.
- Take a course in money management to learn how to handle cash flow and financial decisions. While your credit reporting agencies won’t consider this, it’s a good tactic for meeting all the other criteria on this list.
Lastly, recognize that it will most likely take time to establish a good credit score — something that a millennial is not accustomed to dealing with — so patience is a must. It’s important to understand that a responsible use of credit is critical when it comes to home buying and other big life decisions, so there needs to be a shift in thinking about credit. Knowing that credit is not all bad is beneficial, but understanding that your credit may in fact hold your future hostage is even more important.