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More and more millennials are making progress in raising their credit scores. But qualifying for affordable borrowing rates is still a tough challenge.
Recent data from the credit bureau Experian found that the average FICO score for millennials (those between ages 23 and 38) jumped from 647 in the second quarter of 2014 to 668 in the same quarter of 2019.
That places the typical millennial’s credit score in “fair” category, within striking distance of the “good” category, which starts at 670, according to Experian. A good credit rating will let you qualify for a loan at a decent interest rate.
Without a good credit rating, many millennials face financial barriers. Nearly 60 percent said they had been rejected for at least one financial product, such as a credit card or loan, because of low credit scores, a recent Bankrate.com survey found. By contrast, just 53 percent of Gen Xers and 27 percent of baby boomers reported being turned down.
In another sign of financial stress, the amount of credit card debt held by millennials is rising. At the end of 2018, their average credit card balance had risen 7 percent to $5,231, up from $4,869 in 2017, Experian data show.
Whether you're just starting out or bouncing back from credit problems, you can boost your credit score—but you'll need to be patient and persistent. It can take a year or two to see an improvement, depending on the reasons for your low score, says Bruce McClary, vice president for communications at the National Foundation for Credit Counseling, an organization that represents nonprofit counseling agencies.
Here are steps you can take to get the best possible credit score.
Brush Up on Credit Basics
To improve your finances, you need to understand how credit works. But most Americans don’t know the fundamentals of credit scores, according to a survey by the nonprofit Consumer Federation of America and VantageScore Solutions, a credit score company. Millennials showed the lowest level of knowledge about credit compared with older generations, with only 56 percent scoring in the good or excellent range.
“Millennials often don't make an effort to understand credit scores because they underestimate the stakes involved, such as a drop in their credit score of 30 or so points every time they make a late loan payment,” says Steve Brobeck, a senior fellow at the Consumer Federation of America.
In the survey, nearly 4 out of 10 millennials were unable to identify key strategies that can raise their credit scores or maintain a high one, including making timely payments and keeping their balances low. (More on that below.)
Review Your Credit Report
It’s crucial to check your credit report periodically at the three major credit reporting agencies—Equifax, Experian, and TransUnion. That data is used by FICO and other companies to create your credit score. But there are often problems with the accuracy of that information, according to the Consumer Financial Protection Bureau, such as a wrong name on the file or accounts listed that belong to another person with a similar name.
Problems in your credit report may also result from identity theft. The growing number of data breaches means that criminals can gain access to your personal information and open fraudulent accounts in your name.
You’re entitled by law to a free credit report once a year from each of the three major credit bureaus. Go to AnnualCreditReport.com to ask for a report from one of the companies. Four months later request a report from a second company; follow up in another four months with the third company. That way, you can continually monitor the accuracy of your reports.
Sign Up for a Starter Card
For younger millennials, a simple way to start building credit may be to become an authorized user on their parents’ credit cards or those of other family members. Or if you're still in college, you may qualify for a student credit card with low spending limits. Recent grads may be offered a new card.
Another option may be to sign up for an introductory offer from a retailer, who may give you a discount just for enrolling. But be aware that many store credit cards carry high interest rates, so you may run into trouble if you don’t pay off the balance each month, says Matt Schulz, chief industry analyst at CompareCards.com.
If you have trouble qualifying for a credit card, perhaps because of a poor credit score or short credit history, consider a secured credit card. Offered by most major issuers, these cards require you to put down a deposit, typically $200 or more, to protect the issuer in case you don’t pay. Spending is limited each month to the amount you have on deposit.
“With secured cards, the goal is to charge small amounts and pay the balance on time each month to establish your credit,” says Schulz. You get the deposit back when you upgrade to a regular credit card, which might take a year or more.
Before signing up, check that the card issuer reports your history to all three credit bureaus, because some smaller issuers only report to one, Schulz says.
Consider Alternative Scores
For those struggling with poor scores, credit companies now offer options that include alternative data, which can help demonstrate financial health. With Experian Boost, consumers give the credit bureau access to their banking data to show their payment histories. Experian only takes into account positive information and will stop using the data at the consumer’s request.
Another alternative service, UltraFico, focuses on how well the consumer manages money, including avoiding bounced checks and maintaining positive balances.
You won’t get a huge score increase from these services, perhaps 13 to 16 points, says McClary. Still, if you’re close to a score that would give you a more affordable rate, it could help.
Pay Down Your Balance
Managing your credit card balance consistently has the biggest impact on your credit score. That includes limiting how much you charge, as well as making timely payments.
If you charge a lot on your cards relative to your credit limit, that can hurt your credit score. As a guideline, aim to carry balances that account for no more than 30 percent of your overall credit limit, says Schulz.
You also need to keep close track of your payment due dates. Making payments on time is the single largest factor in your credit score, accounting for 35 percent, according to FICO.
Having your credit card payments automatically deducted from your bank account each month is a great way to make sure you don't miss one, says Rob Oliver, a fee-only certified financial planner in Ann Arbor, Mich. (Get more tips on keeping up with your credit card payments.)
If you find yourself running short of cash and can’t pay off the entire balance, be sure to make at least the minimum payment. "Missing a payment is much worse for your score than not paying off the entire balance," says Oliver.
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