The good news: Millennials are increasingly feeling financially stable enough to start taking on mortgages—23% of new mortgages originated in the last quarter of 2017 belonged to millennials, according to a new survey released by Experian.
The bad news: Plenty of people in this cohort of ages 22 to 35 still feel held back by their credit scores. In fact, there is a significant average credit score difference between millennials with mortgages and those without: 716 vs. 623.
If you're one of those millennials who want to buy a home but doesn't feel like you have the credit score to do it, don't despair. You can devise a plan to boost your credit scores and get your finances into shape, says Douglas Boneparth, a certified financial planner who specializes in millennials and author of The Millennial Money Fix.
"There is never really a quick fix when it comes to improving one's credit score. Usually doing the right things over a period of time is what brings those incremental changes," says Boneparth. "But there are things you can do today to put yourself in a better spot. The people with the highest scores are the ones who put in the most time and energy into making sure their financial situation is strong."
Follow these steps to get into fighting shape before you apply for a mortgage.
1. Get Organized
"You can't do anything until you know what and where everything is. You're going to find out very quickly that there is going to be a rather robust request for financial info [when applying for a mortgage]," says Boneparth. "You don't want to be scrambling for what a bank is asking for. How quickly you can gather your financial data is a great acid test to see how organized you are with your financial life and data."
Start by pulling your credit reports and credit scores to understand where you stand. Review your reports to refresh your memory on what credit cards and debts you have outstanding.
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.
Then, make a list of all your loans, who services them, and how much you pay each month. The same goes for any car loans. Similarly, make a list of all your assets, including bank accounts, 401(k)s and IRAs, and any other savings you might have. Banks will want to know all this information.
An account aggregation service like Mint.com or Personal Capital can help you put together your complete financial picture. Tiller is another service that Boneparth recommends for examining your spending and budgets at a granular level.
2. Write Down Your Goals and Prioritize Them
"A lot of factors contribute to many millennials not being able to afford a home, like the fact that wage growth is stagnant, while home prices have gone up. Many are saddled by student loan debt," says Boneparth. "But you have to be honest with yourself regarding the priority of your financial goals."
You can't do that until you know exactly what they are. If you want to pay off your student loan debt, save for a vacation and buy a home, you need to write all the goals down and prioritize them.
Start by identifying what your goals are, Boneparth suggests, and then quantify those goals by time and value: When do you want to achieve them and how much is that going to cost?
Then, prioritize according to what's most important to you. Once you do that, you can figure out how much to save and when you will reach your goal.
3. Go Over Your Budget and Identify Areas Where You Can Save
You'll have to figure out your cash flow situation and to do that, you need to create a budget and examine where you're spending your money. Boneparth calls this becoming a "master of cash flow."
"Masters of cash flow understand the money coming in and out of their lives almost intuitively," he says.
To get there, you need to create a budget and track your spending, including groceries, utilities, childcare, and entertainment. Check it every three months to see how you're doing and identify the opportunities for savings. You might have to cut expenses, take on extra work or find a new job, but you can't do that until you know how much money is coming in and going out.
Once you have a budget and know how much you can save each month, apply those amounts to the goal system you created. Based on how much money you are able to save, you might have to adjust your goals, whether that means opting to spend less money on a home or extending the amount of time it will take to save up for one.
4. Start to Eliminate Debt and Make Payments on Time
"Eliminating debt and making your payments on time are the two things you need to start doing consistently right away," says Boneparth. "These two actions will have the biggest impact over time on your credit scores."
Remember, improving your credit scores is the key to getting the best rates on mortgages, which can save you thousands of dollars over the lifetime of a loan.
Once you've identified how much you can save each month, you should also figure out how much of your money you can apply to pay down your debts. Cutting down credit card debt should be a primary goal because that will boost your credit scores significantly.
You should also make it a habit to never miss paying a bill on time because even one late or missed payment can drag your scores down. (Late payments stay on your credit reports for seven years, but the most negative impact is at its peak in the first two years.) Set up automatic payments so you don't ever forget.
5. Don't Use More Than 30% of Your Available Credit
Your credit utilization ratio is the amount money you spend on credit cards each month compared with the amount of total credit available to you. You'll want to keep your credit utilization ratio under 30%, and for the best scores, under 10%.
That means you need to tally up the limits across all your credit cards, and only charge, on a monthly basis, 10% of that.
6. Review Your Credit Reports Regularly
Make a point to check your credit reports at least once a year to review them for errors because your scores are calculated based on the information in those reports. You'll find your reports at each of the three credit bureaus: Equifax, TransUnion, and Experian (the publisher of this article). If there are any errors, 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.
7. Don't Open New Lines of Credit
When you're getting ready to apply for a mortgage, avoid opening new credit accounts, because that will likely bring your scores down.
"That's especially true for people who are right on the line between one score range and another," says Boneparth. "Don't let that store credit card be the thing that prevents you from getting the best rates on your mortgage."