Millennials Don’t Understand How to Build Credit

A group of friends having fun together outdoors, sharing media on their smart phones from social networks.  Taken in Capitol Hill, Seattle, Washington.

It’s confirmed—millennials don’t know how to increase their credit scores.

At least that’s what a study from LendEDU indicates. In it, 500 millennials (ages 17–37) were asked questions regarding credit scores, and based on the results, it looks like Generation Y needs to do some credit homework.

Millennial Misconception #1: Use a Credit Card More to Build Good Credit

Almost half of millennials surveyed believe you can improve your credit score by using your credit card more. That is not true. But to be fair, thinking that you should use your credit card more to build your credit score is a general misconception that reaches beyond a millennial mindset. Plenty of baby boomers perpetuate the same misunderstanding about using credit cards more.

The reality is that a “high credit utilization rate” (translation: you use a credit card a lot) lowers your credit score because it makes you look like a bigger risk to lenders,

If you want to begin improving your credit score, you can start with the basics—buy only what you can afford, and pay off your credit card balance before the end of each month.

Millennial Misconception #2: Max Out and Pay Off a Card to Increase Your Score

When asked which behaviors would improve their credit scores, around 36% of millennials selected the following answer: “Maxing out, but paying a credit card on time.” This answer couldn’t be more wrong.

Maxing out a credit card can do serious damage to your credit score. When you max out your credit card, you get a “high credit utilization ratio” (translation: you’re using 100% of your available credit). The actual recommended credit utilization ratio is “below at least 30% and ideally [only] 10% of your total available credit limit(s).”

Besides the impact on your credit score, maxing out your credit card makes you susceptible to higher credit card interest, which can be 20% or more these days. Yikes!

Millennial Misconception #3: Carry Debt for a Good Credit Score

Another 28% of millennials in the survey incorrectly believe  “carrying debt is necessary for a good credit score.” It’s true that you can build up your credit score by taking on a bit of debt, but you’ll still need to pay the balance off each month and use less than 30% of your available credit.

Perhaps the best way to dispel these credit score misunderstandings is to go back to what actually makes up your credit score.

Quick Review: How Your Credit Score Is Calculated

Whether you’re a millennial or not, it doesn’t hurt to brush up on credit score basics.

A credit score is based on a calculation of the following:

  • Payment history: 35%
  • Current credit utilization: 30%
  • Credit history length: 15%
  • New credit inquiries: 10%
  • Credit mix: 10%

Paying your credit card bills on time and keeping your debt under control (again, under 30%) account for 65% of your credit calculation. If you take care of those two, the credit history (15%) should take care of itself, and you’ll get that score moving upward.

A credit score ranges from 300 to 850, with the national average at 673 in 2016. A score of 750 or above is considered excellent, and the other ranges are as follows: 700–749 (good), 650–699 (fair), 600–649 (poor), and below 600 (bad).

Of course, the higher the credit score, the better (lower) interest rate you’ll get for a mortgage, auto loan, etc., which can save you hundreds or even thousands a year in interest payments. So a word of advice to millennials: get a copy of your credit report, and make sure you have a basic understanding of how that score is calculated—so you don’t pay for it in the future.

Image: RyanJLane

The post Millennials Don’t Understand How to Build Credit appeared first on Credit.com.

How to Build Credit Without Spending a Ton of Money

Building credit doesn't have to be expensive.

The journey to building credit can be long and difficult, but it doesn’t need to be expensive. A good credit score isn’t about how much money you have but rather how well you manage it. A poor man could have the same credit score as a billionaire — all it takes is a little work. Learn how to build credit without spending a ton of money with these tips.

Stay Active

Credit scores can only be created when there’s credit activity to report. When you’re on a budget, it can be tempting to avoid charging anything, but doing so won’t help you build credit. Keeping credit cards active doesn’t have to be costly.

Charge a Little

With credit, it’s not about how much is spent or what it’s spent on, it’s about usage. There has to be enough activity generate a score. Whether you charge your morning coffee or a wild night in Las Vegas, you’ll keep your credit issuer happy if you pay it off and monitor how much credit you have available.

If you can only afford to pay off a credit card charge of up to $30 per month, charge that amount and pay it off. Barry Paperno, a credit card expert who writes for Speaking of Credit, suggests using some credit cards for regular monthly fees, like a Netflix or newspaper subscription. This ensures cards stay active and doesn’t require much thought. Plus, you can keep these cards tucked away at home instead of in your wallet.

Become an Authorized User 

The key is finding someone trustworthy who has great credit. Being an authorized user on someone’s card can be a great credit building option. The process to be added as an authorized user is fairly easy and has no application or requirements. (Learn more by reading everything you need to know about authorized users.)

Once someone becomes an authorized user, the card is added to their credit report. If you become an authorized user on an older card, you’ll earn additional points for the length of time the card has been open, an important credit scoring factor. You also receive credit for on time payments. The only potential issue with this is if the primary cardholder starts missing payments or cultivating debt, it impacts the authorized user’s credit score, too. This method is affordable and effective, but can be slow going since some score models don’t give full credit to authorized users, Paperno said.

Try a Secure Card

Applying for a secure card is a great option for those who have poor or nonexistent credit. Secure cards require users to put down a deposit, say $300, which creates a $300 credit limit on that card. The card acts like any other and is reported to the credit bureaus as such, but your spending can’t exceed the amount of the deposit. The card can be paid off as much as you’d like throughout the month, making it a great way to limit spending while showing the credit bureaus your ability to manage credit.

The great thing about secure cards is you’re the primary user, so the credit benefits earned are even greater than being an authorized user.

Report On-Time Payments

While it doesn’t always help your credit to make on time payments for rent, utilities, etc, in some cases it can. “Keep in mind credit scores can only consider what’s on your credit report,” says Paperno. “Your landlord or utilities company has to report it to credit bureau and credit scorers must include it.”

Unless on time payments are being reported, they won’t necessarily help you build credit. Ask your landlord and service providers if they report to credit bureaus. Or, pay rent online to help build credit history or uses services like Renttrack or Rental Kharma.

Set up Automatic Payments

Automatic payments can help ensure on-time payments. This is handy for those who forget to pay bills or travel often. On-time payments help strengthen your payment history, which plays a large role in a good credit score.

Beware, if there’s not enough money in your account for payments. An unpaid balance can be reported to the credit bureaus. Generally, credit bureau information is updated every 30 days so if your payment is only a few days late, you’ll be charged late payment fees but your credit won’t be hurt. Still, it’s best not to risk it.

Keep Accounts Open

If you’ve already got cards open, avoid closing them. Credit history is a major factor in calculating credit scores, so keeping your oldest cards open and active can have major perks. So, keep that card from college, even if it’s only used to charge a monthly Netflix subscription.

Get a Credit Builder Loan

A credit builder loan, a type of installment loan, can be a simple way to build credit. Try for a credit builder loan that reports to all three national credit reporting agencies, so on-time loan payments build up your credit in reports for all three companies. Don’t bite off more than you can chew — late payments or a defaulted loan can cause your credit score to take a huge hit.

You can take out a personal loan for something smaller than a car, like a new laptop or mattress. Take one on out on something you were planning to buy anyway, to avoid spending for the sole purpose of building credit.

Monitor Utilization

Everyone knows paying on time is essential but also so is utilization, the percent of available credit you’ve used. Paperno advises keeping utilization to less than 10% of your credit limit each month. This shows you’re reasonably and responsibly using your credit within your means.

Increase Credit Limit but Not Spending

If you’ve got a decent credit history, you can probably manage to have your credit limit increased. Once your credit limit is increased, keep your spending habits the same. This can help you lower your credit utilization, making your credit even stronger.

Diversify Wisely & Carefully

Diversifying your credit with different types of loans, cards and accounts can help you build credit, but only if you have the means to pay them off. Opening accounts and taking out loans you can’t afford will only put you in the red. Before taking out loans or apply for new cards, ensure you qualify. You can check two of your credit scores for free with credit.com.

Opening new accounts and credit cards can seem like an easy way to increase the credit mix portion of your score, but proceed with caution. Opening a new card impacts the length of time your accounts have been open, a major factor in calculating your credit score. Since this number is the average of the length of time all of your accounts have been open, adding a new account can bring down your total.

As you diversify, monitor credit utilization for each individual card. If utilization is too high on one card, it can cause your entire credit score to drop. Utilization makes up 30% of your FICO credit score while different types of credit make up only 10%.

Image: Ti_ser

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