According to an October 2014 report by the White House Council of Economic Advisors, millennials are having trouble with their credit. 67% of people under thirty have credit scores under 680. Why does that matter? Low scores can mean trouble securing a mortgage or car loan. Some employers check applicants scores before offering them a job.
A poor score can be the canary in the coal mine for future financial struggles. All is not lost, even if you have a less-than-perfect score. Here are 5 simple, concrete steps millennials can take to brighten their prospects and build up a healthy credit score.
Weird, right? I mean, why start out talking about saving when the whole point is being able to borrow?
Well, there is a lot more that goes into your overall credit picture than just your payment history (but, don't worry, we'll get to that shortly). Building up substantial savings is an important part of your overall financial health. Financial advisors may recommend having cash reserves equal to 6 to 9 months worth of expenses. At the very least, you should have enough on hand so that a major car repair doesn't send you racing out to get a loan.
So, why does having savings help? Two reasons:
- It ensures you have cash on hand to pay your bills on time.
- It ensures you have cash on hand for unexpected expenses--like car repairs or medical bills.
Also, when it comes time to apply for a mortgage, you can apply that savings toward your down payment. Many lenders will require costly private mortgage insurance if you put down less than 20%--therefore, saving now can save you even more money in the future.
Okay, now, we're getting to it--credit. Just how much and what kind do you need for a good credit score?
Many financial gurus will tell you there is a silver bullet formula for a perfect credit score. Essentially, what you need to do is think moderation. Scoring models look at the amount of available credit--that includes your student loans, car payments, and even that Banana Republic card you used to buy your first work wardrobe. They take that snapshot of your accounts and compare it to how much you actually owe.
So go ahead and use your credit, just use it wisely.
- Don't carry a big balance. For starters, those finance charges put a major dent in your overall ability to save. Plus, credit reporting agencies are reported to look unfavorably on exceeding 30% of your borrowing limit.
- Pay more than the minimum. Ideally, you would pay off each and every card each and every month. The next best thing is to pay as much as you can. It helps cut down on those finance charges and shows you are responsibly addressing your debt.
- Have credit cards, but not too many. It's not a bad idea to have more than one card, just not so many that you need a bigger wallet. What can help even more, though, is to have a variety of kinds of accounts--a mix of credit accounts and loans.
- Don't open a lot of new accounts. Experts including those at the Federal Reserve caution against opening too many accounts too quickly. However, applying for a number of available lines of credit, especially in a short span of time, can actually hurt your score.
On Time, Every Time.
Perhaps the single most important thing you can do to ensure a good score is to pay your bills on time, every time. FICO says "your history of payments is the largest factor" affecting your credit score.
This is true for your students loans, car payments, and credit card bills. But, it is equally important for those other bills--rent, electricity, phone, and cable. Here are some tips to help you manage your bills.
- Not in your name. Sharing an apartment? A car? Unless you can be responsible for the entire bill, try to avoid putting shared expenses in your name.
- Go automatic. Whenever possible, opt for online bill paying services that make payments automatic.
- Better late than never. Everyone makes a mistake from time to time. Just pay it off the second you realize it's late. If you know a bill will be late for reasons beyond your control, proactively contact the company you owe to make arrangements.
- Never go to collection Having bills "charged off" or go to collection agencies is disastrous to your credit score. Do whatever you can to avoid this.
Reduce, Reuse, Recycle.
What's the best way to manage your debt? Don't get over your head in debt in the first place.
Anyone who has ever watched an episode of Girls knows that a major plot line for this generation is their difficult transition from dependence to adulthood. Learning to live within your means may be one of the hardest parts of that process. You may have gotten used to buying just about whatever you want when you want it. Or, at least, you may have been able to spend your 'discretionary income' without having to worry about paying for your rent or electricity. But, you are all grown up now and it's time to start thinking about your money in a different way.
- Pay bills first. Don't buy so much as a stick of gum until all of your bills for the month are paid.
- Reduce your debt. Pay down student loans and high-interest cards as fast as you can. Always pay more than the minimum.
- Make do with less. Make your own coffee instead of buying a 20 ounce vanilla latte and stick with your iPhone 5 as long as it will last.
A recent Chase Slate Credit Survey reported that 1 in 5 of millennials have never even checked their credit scores. A 2014 report by the Consumer Federation of America found that millenials know less about how those scores are used and how to fix poor scores than any other generation.
It's important to stay on top of your credit score and regularly get a credit report. LendingTree offers a free credit score service as well as credit monitoring.
You won't be ready to buy a house for years, so why worry about your credit score now?
Because poor scores can affect everything from getting a car loan to getting hired for a new job. If you haven't checked your credit report, you won't know if it's accurate. And, that means you won't know if there are problems with it--including errors that need to be fixed.