Millenials have gotten a bad rap over the past few years, most especially for coming across as entitled and irresponsible. But love ‘em or hate ‘em, they’ve also had to deal with one of the worst economic climates since the Great Depression itself. And now it looks like this could be affecting their overall ability to manage debt and, ultimately, their credit scores.
Like all hardships, the economic crisis has led to some bright spots – including a new wariness of debt. Reports show that millennials have lower overall debt even with their student loans. How much lower? To answer that question, a recent New York Times article cited a study by the credit rating agency Experian:
“Millennials have low overall debt (about $23,000 per person on average, comparable to what the oldest Americans have), and the lowest average card debt ($2,700)… But while the average credit score in Experian’s analysis is 681, the average for millennials is just 628.”
So how is it that millennials are taking on less debt but ending up with lower credit scores? Below, we’ll talk about why, plus how you can maintain a positive credit score yourself.
Why Millennials Have Lower Credit Scores
There are a few things working against millennials when it comes to their credit scores, and the problem doesn’t simply lie in high amounts of student loan debt. Millennials also have shorter credit histories, lower credit limits, and more financial hardships which can lead to late or missed payments. When it comes to the anatomy of a credit report, this equals a recipe for disaster.
Why does this matter? Because your credit score is your “report card” of sorts for your finances. A low credit score makes you look like a risky bet to lenders who’ll then either decline your loan application or approve you at a higher interest rate. That can cost you a car, a home, or other types of credit you may need. Or it can lead to a longer debt repayment period on the credit you’re able to maintain. Therefore, a low credit score costs you opportunities and money.
How You Can Maintain a Good Credit Score
A credit score is made up of many factors, which means there are multiple things you can do to maintain a good credit score – even in difficult financial times. While a low credit score can’t be repaired overnight, diligence over a few months can raise your score a significant level. Here are a few best practices to help:
Pay on Time, Every Time. Payment history makes up a whopping 35% of your credit score, which means late payments have a large impact on your overall rating. And lenders aren’t shy about reporting a late payment. Once any payment is 30 days late, a lender can report it and your credit score will take an immediate hit. So even if you can only make minimum payments, make sure you make them every month and do so on time.
Increase Available Credit. The length of your credit history and credit utilization make up a combined 45% of your score. If you have had a credit card for awhile but don’t use it, keep it open so you can benefit from a longer credit history (and continue to not use it). If you have a credit card that is nearly maxed out, ask your lender to raise your credit limit. This isn’t so you can charge more on the card, but rather so you can have a lower utilization ratio. That too will impact your credit score positively. Finally, if you are having a hard time obtaining credit at all, open a secured credit card. Since the balance is paid for upfront, this is easier to obtain and can be a stepping stone to building good credit.
Don’t Apply for Several Loans at One Time, but Do Try to Diversify Your Credit Usage. Every time you apply for a credit card, line of credit, or loan, you will have a ding on your credit score (if you apply for one particular type of credit like a mortgage, you have 30 days to “shop around” and submit other applications – after that, any further applications will appear as a new credit check). Every once in awhile this is okay, but making a practice of applying for credit will hurt your score. And if you do need to apply for new credit, consider a different option than a credit card (such as a line of credit or loan). Diversifying your credit can improve your score. Together, these two factors make up 20% of your score.
Report Errors Right Away. A lesser known evil is credit reporting errors. Unless you obtain your free credit report each year, credit can be opened up in your name without you even knowing. If you go to annualcreditreport.com, you can obtain a free report each year from each of the credit reporting bureaus. If you space each one out, then that gives you the opportunity to check your report every quarter. And if you do spot an error, report it immediately.
Focus on Debt Payoff. One surefire way to improve your score is to pay your debt off as quickly as possible. This leads to better payment history and lower utilization rates. Plus, it just saves you money over the long run. Whether you’re dealing with student loans, credit cards, or all of the above, set a plan to get out of debt and your credit score will thank you.
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