Why Millennials Feel Held Back by Their Credit Scores (Plus 5 Ways To Improve Them)

Many Millennials describe feeling held back because of their credit scores. They think that with a poor credit score, their financial opportunities are limited, making it difficult to get a car, personal loan, house, or even a credit card.

These fears aren’t totally unfounded since Millennials as a whole have lower credit scores compared to older generations. While some credit factors are out of their control, there are a few strategic steps Millennials can take to improve their credit scores and take advantage of better credit deals.

What’s Holding Back Millennial Credit Scores

There are a lot of unique factors contributing to Millennial credit scores today. Let’s get to the bottom of it by breaking things down into three bite-sized nuggets.

They don’t know how credit works.

Unfortunately, Credit Score 101 isn’t a college prerequisite and this unintentional knowledge gap is hurting a lot of Millennials. Nearly 44% of Millennials think that a higher credit utilization actually helps their credit score. And 36% believe that maxing out their credit cards can improve their credit as long as they pay it back on time.

On top of that, a full 25% of surveyed Millennials don’t know what a credit score actually is. Clearly, there’s some work that needs to be done to get many Millennials up to speed on these credit misconceptions.

Shorter credit histories mean lower credit scores.

Youth itself is a credit challenge that every generation has faced. After all, length of credit history contributes to 15% of your credit score. But Millennials have some other issues working against them that previous generations haven’t had to deal with.

In 2009, the Credit Card Act was passed, making it harder for college students to get credit cards if they didn’t have a steady stream of income. While this was meant to protect them from aggressive credit card companies, it also prevented many people from building their credit histories at an earlier age.

Student loans add to debt load.

The student debt crisis is no secret to anyone at this point, but what may be surprising to Millennials is how much it can impact credit. The amounts owed category serves as 30% of your credit score.

Even though installment loans (including student loans) are viewed more favorably than revolving credit (like credit cards), high student loans can still hurt your credit. Not only that, when it comes to qualifying for new debt, like a car loan or a mortgage, that student loan debt hurts your debt to income ratio. That can limit your purchasing power if too much of your monthly income goes towards student loan payments.

Millennial Credit Myths

While Millennials may feel held back by their credit scores, lenders may not always think the same way. Here are three credit myths often believed by Millennials, plus some debunking with the actual reality. You may be (pleasantly) surprised by some of these truth bombs.

Credit myth #1: You need a perfect credit score to buy a house.

This isn’t true. The average credit score for closed mortgage loans is a 721, which is actually lower than it was in 2017. Plus, there are many home buying programs that work around both lower credit scores and annual incomes.

Government-backed loans such as an FHA and USDA require just a 580 credit score to qualify for the 3.5% down payment option. There are even conventional programs like the HomePossible loan from Freddie Mac that work with low to moderate income homebuyers or people in high-cost areas. Any of these mortgages could be beneficial to Millennials, even with a below-average credit score.

Credit myth #2: Student loans don’t impact your credit.

As we just learned, student loans absolutely impact your credit score in many ways. Not only do they contribute to your amounts owed, but late payments can also cause your score to quickly drop.

Defaulting on your student loans can also cause lasting damage to your credit score. On the flip side, however, making consistent payments can improve your score over time.

Credit myth #3: Your credit score is permanent.

Luckily, even a low credit score can be fixed over time. If you’re new to establishing credit, exercising responsible financial behavior can build your history and your score. If you have negative items on your report, time can heal those wounds.

Most negative items automatically drop off your credit report after seven years. That may seem like a long time, but their impact generally lessens every year. So a single late payment from five years ago may still be listed on your credit report, but it’s probably not doing too much to harm your score.

5 Ways Millennials Can Improve Their Credit

We know that a lower credit score isn’t a permanent thing, so what can you do to start improving yours? Here are five ways Millennials can boost their credit.

#1: Pay your bills on time (and do it strategically).

Your payment history is the biggest factor contributing to your credit score, constituting 35% of that magic number. While you ideally want to pay all of your bills on time, you can use a little strategy to help out if your monthly budget ever falls short.

In the near-term, prioritize which bills impact your score the most right now. Be aware that any account can go to collections if left unpaid for too long, but a credit card late payment can cause a drop in your score if it reaches 30 days late.

Things like credit cards and loans are almost always reported to the major credit bureaus on a regular basis. Other bills, like your utility bill, will probably only be reported if you’re extremely late or let it go to collections. Obviously, you want to pay all of your bills on time. But if you’re waiting to get your next paycheck deposited, strategize which bills you pay first.

#2: Lower your amount of debt.

We mentioned earlier that there are two tiers of debt: revolving debt and installment loans. Installment loans won’t have as large of an impact on your credit score compared to your credit cards.

Plus, credit cards usually (although not always) come with a higher interest rate, which costs you more money. By keeping your card balances low, you can improve your credit score while also keeping some extra cash in your pocket.

Keep your credit utilization below 30% on each card. That means you shouldn’t carry a balance more than 30% of your available line of credit. On a card with a $10,000 limit, for example, you’d want to keep your balance under $3,000.

#3: Check for outstanding balances.

What you don’t know may be hurting you! Maybe you moved around a lot and a bill got lost in the mail, or your health insurance didn’t entirely cover a medical bill, unbeknownst to you. Unfortunately, you’re still responsible for anything you owe. The best way to find out what you’re missing is to check your credit report.

See if there are any outstanding accounts you forgot about. Then figure out a way to take care of them. If you can pay it off in full, ask the creditor to remove the negative entry on your credit report in exchange for prompt payment. Just get any type of exchange in writing in order to ensure your account is taken care of and you’re on the same page as your creditor.

#4: Ask for a goodwill adjustment on late payments.

While the effect of a late payment on your credit report does diminish over time, it’s still possible to get it removed early. An easy way to do this is to write to your creditor and ask for a goodwill adjustment to have the late payment taken off your credit report.

You’ll have the best chances for success if you’ve been a customer for at least six months and if you generally make your other payments on time. Explain these points in a letter, then follow up with a phone call to customer service after two weeks if you don’t hear back right away.

#5: Limit your credit inquiries.

Your new credit accounts for 10% of your credit score, but this doesn’t just include accounts you’re actually approved for. It also includes any credit applications. These are listed under an inquiries section of your credit report and each one can deduct five to ten points from your credit score. That may not seem like a lot, but it can quickly add up if you apply for a new credit card every month.

Inquiries are listed on your report for two years but stop hurting your score after just one year. Think strategically about your upcoming financing needs so you can lump similar inquiries together.

Things like car loan applications, for example, only count as a single inquiry if you complete them all within a couple of weeks. It simply shows lenders that you’ve been rate shopping. Credit cards, on the other hand, don’t typically come with this grace period, nor do credit checks that are run for apartment applications.

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