Millennials, or Generation Y, are enjoying their adulthood at a time when credit is ubiquitous. Credit cards were once reserved for the wealthy and considered a sign of prestige. Nowadays, it is common for people to carry around more than one credit card.
Despite this broader knowledge of credit and its importance on their future financial health, millennials 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, millennials have an average credit rating of just 634. In addition, they have more than twice as much debt as Generation Z, averaging $32,698 a person.
Why are millennials 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. What is that element? First, let's see what goes into generating a credit score.
According to MyFico, there are five main factors that go into making up your credit score. Each has a weighted percentage towards the total score. Here is the breakdown:
There is one important caveat to these guidelines though. Credit scores are calculated slightly differently depending on the length of the individual’s credit history. In comparison to baby boomers, millennials would be weighted differently because of their shorter credit histories .
There is one key category where millennials are likely going wrong with their credit scores, the amounts owed category. There are 2 key components to keep in mind here. The overall amount of money owed and the amount of money owed in relation to the level of credit available.
The thinking is this: if one person owes $9,000 on a $10,000 line of credit, they’re likely struggling to stay afloat. Conversely, a person owing $9,000 on a $50,000 line of credit would be seen as more stable. They don't appear to be at the mercy of their credit maximum.
This then appears to be the main area where millennials are failing to properly utilize credit. According to a survey commissioned by Bankrate, just 8% of millennials have more than one credit card. This is 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. Because of this, 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.
The fact that a whopping 63% of millennials don’t have a single credit card shows that many are trying to stay away from credit entirely. Yet it’s a reality that many millennials will eventually need credit in some form or another. The time will come when they will need it to purchase a car, secure a mortgage, or tackle an unforeseen financial dilemma.
For this reason, millennials should begin establishing a credit history now. 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.