What You Need to Know About America's Credit Gap

Over the past few years, it appears that America's credit gap is getting bigger. A recent survey from VantageScore.com showed that many millennials are unable to get credit. But if we take a close look at the choices millennials are making, the widening credit gap isn't a surprise at all.

Millennials Are Actively Avoiding Credit Cards

According to survey results by Chime, a mobile banking alternative, almost 70 percent of millennials are choosing to use debit cards over credit cards. Who can blame them? This is the generation that watched their parents struggle with debt during the Great Recession. So it looks like this demographic is being extra cautious to avoid debt. Is that a bad thing? Absolutely not. If you feel uncomfortable using credit cards, then you should avoid them. Millennials are smart to wait until they feel confident that they can use them responsibly and avoid debt. But with their caution, there are trade-offs.

The Consequences of Using Only Debit Cards

Since many millennials have postponed building credit, it makes sense that credit is more accessible to those older than millennials. It simply has to do with having a longer credit history and showing that you have been responsible with credit. Your payment history comprises 35 percent of your FICO score. It really is a very big deal.

Here's the problem: Debit cards do not help you build credit. There are arguments that expenses such as rent and utilities should be included in credit scoring models, but there are also sound arguments against that. Whichever side of the argument you agree with doesn't really matter. About 90 percent of lenders use a version of the FICO score when considering applications for credit. And currently, the FICO score doesn't count paying your rent on time as a sign of being creditworthy.

So at the moment, credit cards remain a good way to build credit as long as you keep a low balance and pay your bill in full and on time. Hey, it would be awesome if you could inherit a great score from your parents and or share the excellent score that your spouse or significant other enjoys. But that's not an option.

The other problem with using debit cards is the possibility of a hacking. With a credit card, the most you'll lose is $50, and most major credit card issuers offer zero liability. Debit cards don't have these protections. If a thief gets your credit card, they can go on a shopping spree, but the money isn't coming out of your checking account. With a debit card, your account gets drained. You'll most likely get most if not all of your money back, but it could take over a week. In the meantime, you could have a cash flow crisis.

How to Fix the Credit Gap

One of the ways to make millennials more comfortable using credit is to encourage consumer education. Many of them probably aren't aware that they get fewer consumer protections with debit cards or that those with higher credit scores save money on car insurance, mortgage rates, health insurance, and more. And they should know there are also ways to build credit without using credit cards. Getting an auto loan is a good way to start a credit history. There's a set number of payments and it can't lead to ballooning debt.

But even when millennials get more involved with credit and start to close America's credit gap, they won't magically leap into the ranks of the excellent-credit-score crowd. However, there are ways to kick start your credit. If your credit history is so limited that you can't get approved for a decent unsecured credit card, then apply for a secured credit card to improve your score. Credit is one of those areas where you have to prove you're worthy. So it takes some time and a lot of patience. Unless you already have a big credit faux pas on your report, you can build your credit to a decent level in about a year to 18 months by responsibly using a secured credit card.

When your score is high enough, if your secured card doesn't allow you to "graduate" to an unsecured credit card with the same issuer, you can apply for an unsecured card for fair credit from a different issuer. You can keep track of your credit progress by signing up for your free credit score on LendingTree. It's also possible that your secured card issuer offers a free credit score so check out the fine print and see what the credit card issuer offers in that regard.

The key to credit score success is to use the card every month, keep the balance below 10 percent of your credit limit, and pay the balance in full and on time. In fact, pay all of your bills on time. With a little time, millennials will start to close America's credit gap.

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