Millennials are feeling the pressure that comes from a less-than-stellar credit history.
Almost half of all millennials—46%—said they feel held back by their credit scores, according to research conducted by OppLoans, a financial technology firm. OppLoans surveyed 2,000 American adults in June about their credit scores. Respondents between the ages of 18 and 34 were categorized as "millennial."
In the survey, millennials described how their credit scores prevented them from reaching financial goals like buying a car, buying a home, or accessing loans. In fact, only 39% of people ages 25 to 34 own a home today, compared with 48% in 1977.
Nearly one in four millennials said their poor credit scores hurt their chances of buying a car (27%), getting a loan (26%), getting a credit card (23%), or getting an apartment or house (25%).
In addition, 14% of those surveyed said they were forced to live with roommates because their poor credit wouldn't allow them to rent on their own.
Experian's own State of Credit data indicates that the average credit score for those in Generation Y, also known as millennial, is 638. That's less than the overall U.S. average of 675 and a long way from the so-called Silent Generation's stellar 729.
While younger consumers generally have lower credit scores because of shorter credit histories, it's also true that millennials don't seem to be prepared for the realities of how credit affects their financial lives:
- 24% of those surveyed by OppLoans said they had received insufficient educations about the habits and techniques required to build a strong credit history.
- 15% surveyed said they regularly miss credit card payments.
- 43% described their credit card debt as unmanageable. (Experian's State of Credit survey found that millennials averaged $4,315 in credit card debt in 2017.)
But it doesn't have to be this way. Here are four steps to improve your credit scores and take charge of your financial lives:
1. Always Make Payments on Time
Regardless of how much debt you have, the most important thing you can do—starting now—is pay your bills on time, every month, without exception. Even if you can only afford the minimum balance on your credit cards, making them on time consistently will boost your credit scores.
That's because one of the biggest factors in determining your credit scores, across all credit scoring models, is payment history.
When you develop a track record of paying all your bills on time all the time, your credit scores will go up. But even one late or missed payment can drag your scores down. The late payment will show on your credit report for seven years, but the negative impact will be the worst for about two years, then diminish over time.
More than a third of all millennials surveyed missed credit card payments because they forgot about them. The easiest way to avoid this is to set up automatic payments that cover the minimum amount due. Then, you can make additional payments to pay off the balance and avoid interest, but at least you won't ever incur late fees or miss payments because you forgot about them.
2. Tally up How Much Credit You Have Available, and Don't Use More Than 30% of It
Another factor that determines your credit scores is your credit utilization ratio—that is, the amount of credit card debt you carry on a monthly basis compared with the amount of credit you have available to you.
To calculate it, look at how much you spend on all your credit cards each month. Then, divide that number into the total credit limit on all your cards. So if you typically charge $2,000 each month across three different credit cards, and your total credit limit across all those cards is $10,000, your utilization ratio is 20%.
Make sure you keep your ratio under 30% each month—and under 10% for the very best scores. If your utilization ratio is too high, there are two ways to improve it: lower the amount of money you put on a credit card each month, or increase the credit you have available to you. (You should know that if you try it increase your credit limits on your cards or apply for new credit cards, your scores will likely take a temporary hit.)
The best way to use credit cards is to pay your balance off each month. That way, you'll never incur interest charges, keep your utilization rate as low as possible, and build a positive record of making payments on time.
3. Check Your Credit Reports Regularly
Your credit scores are calculated based on the information in your credit reports, which are maintained by the three credit bureaus: Equifax, TransUnion and Experian (the publisher of this article). Make it a habit of checking your credit reports from each of the three bureaus.
Look for inaccuracies or discrepancies that could be dragging your score down. If there are any, you should initiate a dispute with the credit bureau.
Get your free credit report from Experian, where you can also get your FICO Score. You are also entitled to one free credit report every 12 months from Experian, Equifax, and TransUnion at AnnualCreditReport.com.
4. Get Educated
The world of credit scores can be confusing and complicated, but the more knowledgeable you are, the more likely you are to keep your scores in the best shape possible. Check out Experian's Credit Report & Scores section for up-to-date information on what goes into your credit scores, how to improve them, and news on changes to the credit scoring and reporting industry.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.