Is a bad credit score dragging you down? Almost half of millennials (46%) feel that way, according to a new survey conducted by OppLoans.
It's an understandable feeling, given that millennials came of age during one of the worst recessions in decades. Many millennials emerged from the recession with delayed careers or lower-than-expected earnings and burdened with excessive student loan debt before they even started.
As a result, millennials tend to have lower average credit scores. According to Experian, millennials had an average VantageScore of 638 in 2017 – well below the overall average score of 675. In the previous year, TransUnion found that 43% of millennials had scores considered to be subprime.
The ripple effects of bad credit are reflected in many of the survey results. One-quarter of millennials claim that poor credit adversely affected their housing opportunities, while 14% of millennials continue to live with roommates because bad credit keeps them from finding their own place.
Similar percentages of millennials found that bad credit prevented them from getting a loan or line of credit (26%), buying a car (27%), or qualifying for a credit card (23%).
Another reason for millennials' low credit scores may be a lack of education about credit – how to build credit and manage it well. Almost one-quarter of millennials claimed insufficient preparation to be able to handle credit.
Perhaps we can help. Let's start by going over the five primary factors that make up a credit score.
Payment history is a big determining factor of your credit score. A missed payment can affect your credit score for up to seven years – and the more payments you miss or the longer it takes you to make good on them, the more your score will suffer. Since 15% of the OppLoans survey respondents said they regularly missed payments, their low scores are no surprise.
Credit utilization – the amount of credit you are using compared to your limit – makes up a significant part of your score. A good rule of thumb is to keep your outstanding balance below 30% of your credit limit, and lower than that if possible. Millennials often have lower credit limits – making this challenge even harder.
The length of your credit history plays a role, because creditors have more available information to assess your risk. With a shorter credit history, millennials must be careful as negative events can have a larger impact – there's no long history of good credit to argue that the negative event is an isolated mistake.
New credit applications and the mix of active credit types that you have also contribute to your credit score. If you open multiple new accounts in a short time, lenders assume you may be overextending yourself. Credit mix refers to the type of credit accounts you have – if you show that you can handle both revolving credit card accounts and installment loans or mortgages correctly, you're a better credit risk.
If you're a millennial suffering from a poor credit score, now's the time to take corrective action. Make, at least, the minimum payment on time for every bill that you owe. Check your current credit report to make sure there are no errors or fraudulent use of your account that is dragging down your score. Control your spending by creating a budget that allows you to pay down debt and be choosy about opening any new credit accounts.
It's not an easy task but raising your credit score can be a rewarding effort – both personally and financially. Why not start today?
You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
Photo ©iStockphoto.com/NicolasMcComber
