Today’s post was created in partnership with Credit Sesame.
To say that millennials have a complicated relationship with credit is putting it lightly. According to Avant, the typical 18 to 34-year-old has a credit score of 625 and they’re using 43% of their total credit limit.
Those numbers don’t add much to millennials’ appeal, at least where lenders are concerned. That translates to higher rate interest rates on what they borrow, assuming that they’re able to get approved for a loan in the first place.
Good credit health is a must for any millennial who’s interested in buying a car, getting a mortgage or refinancing their student loans. If you’re ready to see your score climb, here are five steps for getting your credit in shape.
1. Check your credit report
A credit report is a compilation of information about your different credit accounts. Your report lists creditor names, account numbers, balances owed and payment history for each loan, credit card or line of credit you have. You have many different credit reports, including one each from each of the three major reporting agencies, Experian, Equifax and TransUnion.
So why are your credit reports so important? Simple. The information in your report is what’s used to calculate your credit score. If there’s an error on your report, such as a payment that wasn’t reported properly or an account that doesn’t actually belong to you, that can drag your score down.
Checking your credit report regularly is a smart way to spot errors that could hurt your score. Get your free credit report card from Credit Sesame and go over it carefully to look for mistakes or inaccuracies. If you find one, move on to the next step.
2. Fix any errors
The Federal Trade Commission estimates that millions of consumers have an error on their credit report. Some errors can hurt their chances of getting a loan or cause them to get stuck paying a higher rate. If you fall into that category, you don’t have to take it lying down. The Fair Credit Reporting Act gives you the right to dispute errors so they can be corrected.
There are two ways to initiate a dispute. First, you can mail a written request to the credit bureau reporting the information. If you decide to go the snail mail route, be sure to include the account number and a detailed explanation of what you’re disputing.
The other option is to dispute an error online through the credit bureau’s website. That’s likely to be preferable to tech-savvy millennials. Once you initiate a dispute, the credit bureau has 30 days to follow up and remove or correct anything they determine is inaccurate.
3. Sign up for a credit card
Credit cards can be powerful tools for building credit but millennials don’t exactly flock to them. According to Equifax, 41% of 20-somethings avoid plastic at all costs. While that keeps them from racking up credit card debt, credit avoidance doesn’t do them any favors where their credit score is concerned.
If you’re disciplined about spending and budgeting, a credit card is a great way to establish a positive payment history and grow your score. Using a card or two sparingly and paying it off in full each month can give you serious points for credit utilization. This is the ratio of how much you owe versus how much total credit you have, and it accounts for 30% of your score.
Generally, lenders want to see a credit utilization ratio of 30% or less. As mentioned earlier, millennials are well over that mark, using 43% of their available credit. Adding another credit card with a decent credit limit can lower that ratio and raise your score, so long as you don’t increase your debt along with your available credit. Just make sure to compare interest rates and fees to get the best deal on a card. Of course, avoid running up a balance.
4. Consider a small personal loan
If you’re absolutely against the idea of using a credit card to help your score, a personal loan may be the next best thing. It’s possible to get a small personal loan, either online or from your local bank or credit union, without having to put up any collateral. Interest rates tend to be more favorable than credit cards and the loan terms are usually flexible enough that you can work out a payment that fits your budget.
Personal loans are installment loans, not revolving credit lines. They are scored differently than credit cards. The most important thing for millennials to consider is how much the lender wants to charge for fees and interest.
Getting a loan through an online lender may be easier than a traditional bank but watch out: the rates can go as high as 36%.
5. Put your bills on autopilot
Your credit score is a numerical pie and payment history accounts for the biggest slice. Thirty-five percent of your FICO score (and a similarly large portion of your VantageScore) is based on whether you pay your bills on time. If you’re trying to build credit, the last thing you want to do is miss a payment. Even one late payment can chip up to 100 points off your score.
Automatic payments eliminate the need to worry about due dates. If you’re not comfortable having your payments drafted out of your checking account automatically, at the very least set up payment reminders. It doesn’t cost anything to set up alerts through your online banking system or a free app like Mint and the reminders could save you serious stress where your score is concerned. Try Prism Money, a free app that is just for managing the bills you pay.
Building good credit in your 20s can work to your advantage well into your 30s and beyond. If your score could use some help, the tips outlined here can help you get your credit in peak condition.