What Millennial’s Need to Know about Their Credit

Millenials, or Generation Y, are enjoying their adulthood at a time when credit is ubiqitous. Whereas it wasn’t so long ago that credit cards were reserved for the wealthy and considered a sign of prestige, today it is common for people to carry around more than one different card.

Yet despite this broader knowledge of credit and its importance on their future financial health, millenials have lower collective credit scores than any of the other three adult generations (greatest, boomers, generation X). According to statistics released by credit information firm Experian, millenials have an average credit rating of just 672, despite carrying the lowest average debt of any of those generations.

Why are millenials failing to maximize their credit potential? It appears they are not paying attention to at least one key element in how their credit scores are calculated, which is doing them in despite their otherwise good credit practices. What is that element? Let’s first take a look at credit scores and how they’re calculated to attempt to get to the bottom of this mystery.

Understanding Your Credit Score

According to MyFico, there are five main factors that go into making up your credit score, with each having a weighted percentage towards the total score. They are (with weighted value in parentheses):

  • Payment History (35%) – This could alternatively be called your “late”payment history; it is based on your history of making late payments, including how recent they were, and how much was owed.
  • Amounts Owed (30%) – There are a number of factors at work in this score, but the main one is determining how much money you owe, as well as how much of your credit is being used.
  • Length of Credit History (15%) – This is precisely how it sounds. Generally, a longer credit history is rewarded with higher scores, as it gives creditors more information about you.
  • Types of Credit Used (10%) – This considers the various types of credit accounts you have had, and your history with each.
  • New Credit (10%) – This represents how many new credit accounts you’ve opened or tried to open within the past two years. Attempting to open too many accounts in short order can signify desperation, and generally lowers your score.

There is one important caveat to these guidelines, which is that credit scores are calculated slightly differently depending on the length of the individual’s credit history. So those with shorter credit histories (like millenials) will likely be weighted slightly differently than baby boomers.

The More Credit The Merrier

There is one key category above that likely pinpoints where millenials are going wrong in their credit scores, and that is the amounts owed category. While the overall amount of money owing is certainly taken into account, the amount of money owing in relation to the level of credit available is another key component.

The thinking is thus: if one person owes $9,000 on a $10,000 line of credit, they’re likely struggling to stay afloat. On the other hand, a person owing $9,000 on a $50,000 line of credit is perceived to be more stable, as they’re not straining at the leashes of their credit maximum.

This then appears to be the main area where millenials are failing to properly utilize credit. According to a survey commissioned by Bankrate, just 8% of millenials have more than one credit card, thus keeping their credit limit overly low in relation to how much of that credit they’re likely using. That is well below the two card ownership rates of the other generations.

It’s possible millennials falsely believe that having less available credit is good for their credit score, which is why they’re limiting their exposure to lines of credit. It’s more likely however that they’re simply cautious of the perils of credit debt, having grown up during a time when credit flowed freely, and the global economy and US housing market eventually collapsed under its weight.

Living With Credit Even When You Don’t Want To

The fact that a whopping 63% of millenials don’t have a single credit card at all seems to bear out the fact that many are trying to stay away from credit entirely. Yet it’s a reality that many millenials will eventually need credit in some form or another, whether it’s to help them purchase a car, secure a mortgage, or tackle an unforeseen financial dilemma.

It is therefore recommended that millenials begin to establish a credit history now, and do so taking in the information detailed above. Just a small line of credit being utilized now and then, while keeping its balance low, will have a great impact on your credit score. While it may result in small fees you could otherwise avoid, by staunchly refusing to take on credit now, you run the risk of not being able to get credit later when you might really need it.

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