A Basic Guide To Credit For Millennials

Just a generation or two ago, credit cards were once an uncommon commodity reserved for the wealthy and those with the utmost financial trustworthiness. These days however, credit cards are everywhere and just about anyone with a heartbeat can get their hands on one. But the education surrounding credit and credit cards is definitely lacking. Even more surprising is that the average consumer carries around more than one credit card at all times.

Proof that the financial education surrounding credit is lacking can be seen by a recent study from Experian stating that the average credit score for millennials is just 625. Baby Boomers had an average score of 709 and Generation X was 650. This goes to show that as time goes on, even though credit card and loan use is on the rise, we are becoming less financially responsible as a society.

At Credit Cage, we wholeheartedly believe that there is not enough financial education information out there. Most schools do not teach any finance information to our children. Sure some high schools offer economics courses however those focus on big picture finance of our country, not focusing on personal finance and understanding how credit and loans work. Clearly society needs help understanding how credit scores work.

Understanding How Credit Scores Work

MyFico has en excellent breakdown of the 5 main factors that go into the calculation of your credit score. They’ve even gone so far as to weight the sections. We will break down each of the five factors and provide you with the weight in brackets “[]”.

• New Credit [10%] – New credit is the amount of credit lines, whether loans or credit cards, that you apply for within a certain period of time. Requesting several new lines of credit in a short period of time can make you appear desperate for cash. Especially if you don’t have a very long history of credit use.
• Credit Types Used [10%] – Another factor they look at is the type of credit lines you are using. Credit cards, retail store accounts, mortgages, auto, etc.
• Length of Credit History [15%] – The longer the credit history you have the better. The longer you have been responsibly borrowing money the more you are able to be trusted. Of course, that is if you are responsibly borrowing.
• Amount Currently Owed [30%] – This is a huge factor for your credit score. Are you carrying a lot of debt? Do you pay off your cards entirely each month? These factor in heavily in assessing you as a lender risk and what your credit score should be.
• Payment History [35%] – You’ll want to make sure you are paying on time every time to make sure you maximize this portion of your credit score. A lender wants to see that you are paying back the money you borrow without missing payments.

Something important to note for millennials or anyone else who is new to credit is that for new borrowers the weights may be different. This is because you have no credit history to base off of. So putting a 15% weight on nothing doesn’t exactly work out for the equation.

Higher Credit Lines is a GOOD Thing

We are often asked if having a higher available credit is a good thing or something that you should shy away from. We can definitively tell you that it is a GOOD thing! While you obviously want to be a little more careful losing a credit card that has a $20k credit line, having a $20k line of credit is great for your credit score. As mentioned above, “amount currently owed” is a big factor in your credit score. But what most don’t realize is that it is actually a ratio of amount owed compared to amount of credit available.

Think about it like this. If your credit card company only trusts you with a $3000 line of credit, and you currently owe $2900 on it, then it appears like you are struggling and very close to maxing out your credit line. However, if you currently owe $2900 yet you are trusted with $20,000 you appear to be in pretty good shape as long as you are making regular payments on time.

The problem when it comes to millennials in general is that they don’t understand how to use credit the right way. So much so that according to Bankrate, 63% of millennials don’t even have a single credit card. It’s hard to worry about ratios and amount owed if you don’t use credit cards at all. And by the way, credit cards are an amazing tool that everyone should be using if you actually understand how they work. You can save thousands of dollars a year using credit cards properly.

Why You Should Still Use Credit Cards

It’s clear from statistics that millennials are afraid to use credit cards. While it may be possible for you to live your day to day life right now without worrying about credit, one day you will need a loan for something. It might be for a car or for a house, but one day you will need a loan and the lender will pull your credit score. If you have not been using credit cards or borrowing money on loans then you will have no credit history for them to look at. Meaning you will more than likely get denied the loan.

The best thing you can do for yourself is to start responsibly using credit cards and building a history of positive financial responsibility.  Get a rewards credit card, and treat it like a debit card. Meaning spend only what you know you have in the bank to cover paying it off and pay the entire balance of the credit card off each month. This will help you establish a history of good credit use while not costing you anything.