If you’re between the ages of 20 and 35 and struggling with finances, you’re not alone. According to credit agency Experian, “43% of millennials have described their credit card debt as unmanageable” – averaging $4,315 in credit card debt in 2017.
The good news? There are plenty of ways out of that overwhelming debt and there are lots of ways to increase your financial well-being. One of the best first steps to getting in great financial shape is to improve your credit score.
What is a Credit Score?
A credit score is a record of how you’ve used credit. It tells a summarized story of your financial history, and it’s used to determine how you’ll use credit in the future. Scores are calculated by credit agencies, such as Experian, Equifax, and TransUnion. Your score may differ based on the agency reporting it.
If you’ve had a “credit check” for any reason, your credit history and corresponding credit score is what is being “checked.” Your credit score can be used as an advantage or a roadblock to many credit privileges, including renting an apartment, securing a mortgage for your first home, signing up for utilities or other monthly services, and getting a loan or opening a credit card.
Think of your credit score as a report card on your financial habits. If you’re a millennial, it’s common to feel like you don’t have a good grasp on habits and practices to build your credit. That’s okay! The great thing about your credit score is that after just a few easy changes, you can start seeing improvements.
Why Credit Scores Matter
According to the Pew Research Center, “more Millennials have outstanding student debt, and the amount of it tends to be greater compared to earlier generations.” Millennials have also been hit the hardest by the Great Recession, resulting in them forming households more slowly and requiring longer stretches of moving back in with their parents for financial reasons.
For millennials, it may feel like the odds are stacked against you, but taking control of your financial wellness is important and absolutely doable. You can help create favorable conditions for future loans, credit cards, and more just by increasing your credit score. The benefits might include lower interest rates for a mortgage on your first home. Or, you can look forward to lower or no deposits required for services or utilities and more overall credit trustworthiness. Good financial habits are best started early, but even if you’re just learning about them in your 30s, you’re still setting yourself up for success in the future.
5 Ways to Improve Your Credit Score
Pay on time
The easiest way to quickly make a difference is to ensure your minimum payments are being made on time. Each month, you have a chance to improve your score just by making consistent and on-time payments to your bills or existing lines of credit. The reality is, creditors want to see that you can be trusted to pay back a loan within the confines of your loan agreement. If you can’t make the minimum payment due, consider reaching out to your loan or credit card issuer about the problem between your income and your ability to make a payment. They might be willing to work with you instead of sending your bill to collections.
Speaking of collections, do not (we repeat, DO NOT) let anything go to a debt collector. This is a red flag to credit issuers. Stay up to date on everything you owe, make a calendar, make a spreadsheet, do anything and everything that will help remind you to pay on time every month.
Keep credit utilization low
If you’re already accustomed to maintaining credit card debt and making the minimum payment each month, that’s a great start. However, if your accounts consistently have a high balance on them, it could negatively impact your credit score. Creditors want to see that you’re able to responsibly use the amount they’ve given you. How do you do this? Keep your credit utilization low.
Credit utilization is the percentage of credit that you’re using. For example, if you had a credit card limit of $1,000 and you have a $500 balance on it, your credit utilization is 50%. A low credit utilization is considered 30% or below.
Gradually open new accounts
Picture this: You get a new job, move out of your parents’ home and apply for 5 different credit cards in order to get a new work wardrobe, a nice big 4K HDTV, and a bunch of new furniture for your new place. In theory, this sounds great. In reality, it’s a nightmare for your credit.
Opening multiple accounts at the same time is a bad idea. It signals “I’m panicking and need a lot of money and I don’t have it” to anyone looking at your credit report. The better way to do this is to open one line of credit at a time. Consider applying for one relocation or personal loan to furnish the basics of your new place and get a few outfits for your new job.
Later, once you have enough saved up, you can purchase those big ticket items and truly enjoy owning them instead of paying them off. If you do have to go the credit card route, look for low interest rates offered through a bank or credit union before you check into store credit cards – they’re famous for skyrocketing interest rates after “promotional” periods of no interest. Avoiding store credit cards altogether is one of the best things you can do. And remember, open new accounts gradually, not all at once.
Don’t close accounts
Getting ahead while you can is always a good idea. If you’ve recently taken, say, your tax return and put it toward your debt, you could be looking at a freshly paid off account. If you’ve diligently worked toward a zero balance from a high balance, take a minute and congratulate yourself! Seriously, that’s a big deal. You deserve to celebrate each step toward your debt-free future. Maybe you even felt so held back by the payments and looming debt that you’re ready to close the credit line for good. Stop right there!
If you’ve had an account for any length of time, that is an incredibly valuable asset. As an account matures and you’re responsible with it, this will positively impact your credit score. The only exception to this rule is if your credit card has a massive annual fee and you’re looking to get rid of it. Otherwise, keep those accounts aging and open – even if they’re paid in full. This shows creditors that you have the option to spend, but you’re not spending more than you need.
Monitor your score
Lastly, it’s going to benefit you to keep an eye on your credit score from time to time. It’s rare, but you may find something inaccurate that you will need to dispute. Be sure to monitor your credit history for new accounts, new balances or unknown spending activity – these are all signs of credit card fraud or identity theft. The earlier you spot these troubling signs, the sooner you can stop it.
On a positive note, you’ll be happy to see your score improve from month to month as you continue your good financial habits.
Ways to Build from No Credit or Low Credit
You can still build credit If you currently have no credit history or if your credit score is below average. You may have fewer options for building your credit, but you may be surprised how willing banks, credit unions, (even family and friends!) will be willing to work with you.
Here are a few ways you can improve your credit score and credit trustworthiness:
Get a secured credit card or loan
A secured loan is often called a collateral loan. This means you borrow against something you own in order to get a lower (or affordable) interest rate. It’s most common for collateral to be in the form of a vehicle that you own or a savings account with a substantial balance. This is a really great option for credit building, because unlike credit cards, you won’t be tempted to spend more that you can.
Another option is a secured credit card. These unique types of credit cards require a security deposit in the amount of your credit line. Using this type of credit card can set you up for success and show creditors that you can pay on time and use credit wisely. Soon enough, you’ll be rewarded with an upgrade to an unsecured card and be well-versed in best practices for managing a credit card balance. Think of it as a credit card with training wheels.
Get a co-signer and make them proud
If a secured loan doesn’t work, you may be able to get a line of credit or a loan with the support of a co-signer. Since the co-signer is responsible if you don’t make payments on time, you’ll want to really be committed. Make sure your so-signer understands how co-signing works and that they’re not just there as a financial safety net: This loan will also impact their credit.
Become an authorized user on a family or friend’s account
You can also build your credit by being an authorized user on an established line of credit, usually with an immediate family member or close friend. All they will need to do is add you to their account as a user and you’ll get a card of your own for making responsible purchases. Similar to co-signing, your spending habits and payments will affect your family member’s or friend’s credit. Make sure they, and you, know what you’re getting into before agreeing to this deal.
- Your loan or credit approval will not only depend on your credit score. Other factors include: income, income-to-debt ratio, and your available assets.
- You can have a lot of debt and still have a great credit score.
- You can have little to no debt and have a bad score.
Improving your credit score will take some time
Building your credit score, especially from a low score resulting from damaging financial behavior, will not happen overnight. Allow at least six months to start seeing positive changes in your score. We promise – once you start making the right financial decisions, it will be worth the wait.