Millennials Are the Worst at Managing Debt
(Dallas, TX-National-Credit-Solutions) Millennials have had a rough entry into adulthood: not only have they struggled to find entry-level jobs in a tough economy, but they are also the worst at managing their debt.
Most Millennials (ages 19-29) have piles of student loans to pay off, shaky job prospects, and a poor understanding of how to properly manage their credit. Experian’s “State of Credit” study found that the average credit score of Millennials is shockingly low: 628.
This low number is surprising, considering that Millennials own an average of only 1.5 credit cards and carry an average balance of $2,700. While other generations have higher balances than these Millennials (the national credit card balance average for people 30-65 is $5,300), this younger generation has little knowledge of how to properly manage its debt.
Although Gen-X and Millennials are just as likely to make late payments or max out their credit cards, Gen-X has more assets and longer credit histories than the Millennials, which means that their credit scores do not suffer like those of Millennials.
Experian’s study also showed that Millennials are the most hesitant generation to accept loans, which is largely due to the unstable economy and the poor job market for young adults. Yet despite the fact that more young adults are avoiding borrowing money, their generation still finds itself burdened with debt and at a loss of good debt-management skills.
It seems as though many Millennials were never taught how to properly build credit or how to manage their debt so as not to damage their credit score. So if you are one of the millions of Millennials struggling with debt, here are three ways you can improve your credit score:
1) Get a Credit Card
More and more Millennials are avoiding credit cards, perhaps because they fear they won’t be able to control their spending habits. However, since you need credit history to have a credit score, it is essential for young adults to have a credit card. Even if you only charge a small amount to your credit card every month, you are still building good credit!
2) Pay your bills on time
This one might seem obvious, but many young adults are juggling new careers, student loans, car loans, and rent, so many of them decide that making a late payment now and then is acceptable. Unfortunately, this is not the case. Since Millennials have a short credit history and few assets, it is important that you pay your bills on time. Start budgeting your money to ensure that you can make your payments every month.
3) Choose transportation wisely
Don’t splurge on that expensive SUV that will eat away at your bank account. Instead, find a reasonable, affordable car or rely on public transportation. This will help you save money so that you can pay off your bills on time and keep your credit score strong.
Although Millennials are facing a tough job market and are wary of borrowing money, it is important for them to learn how to manage their debt more effectively in order to improve their credit scores.
FICO vs VantageScore
(Dallas, TX-National-Credit-Solutions) When discussing credit scores, FICO – the credit scoring company, Fair Isaac Corporation – always comes up at some point during the conversation. Because of FICO’s dominance in the lending industry, fewer people know about VantageScore, a second credit scoring company that started as FICO’s rival eight years ago. Both FICO and VantageScore provide lenders with credit scores, but each one takes a different approach to calculating the scores. Here is a look at some of the biggest differences between the two credit scoring companies:
1) The Scoring Models
FICO’s scoring model consists of combining various elements of your credit history to obtain a score between 300-850. The higher your credit score, the less of a risk you are to lenders, which means you will qualify for better loans, top cash back, and more reward cards. If your score is on the lower end of the scale, you are considered a high-risk borrower, and therefore you may have trouble getting a loan.
The VantageScore is largely based on a 24-month review of your credit report, which includes components similar to that of the FICO score – payment punctuality, your available credit, the amount of debt you have, etc. One of the most noticeable differences between FICO and VantageScore is the scoring model: VantageScore combines a three-digit number ranging from 501-990 with a letter grade to reflect your credit standing. For instance, if you have a VantageScore of 850, you will be assigned a letter grade of “B”, and if you have a score of 920, you will have an “A”. Similar to the FICO scoring system, a high credit score is desirable, and a low score means you have poor credit.
2) Scoring Requirements
It shouldn’t come as a surprise that to have a credit score, you must have some sort of credit history. FICO requires you to have at least six months of credit history and at least one account reported in the past six months. VantageScore, one the other hand, requires only one month of history and an account reported to the Credit Reporting Agencies within the last two years.
So what does this difference mean for credit card users? It means that VantageScore can score millions more people, which can be especially beneficial for those who have just recently started to build credit or those who have not used credit recently.
3) Late Payments
Late payments can damage your credit score, which is why it is crucial to always make your payments on time. That being said, VantageScore looks at the various types of late payments differently. If you are late on your mortgage payments, your VantageScore will be negatively impacted more than it would if you made a late payment on a car. Alternatively, FICO treats all late payments similarly; so paying your mortgage late won’t devastate your FICO score as much as it will your VantageScore.
Although many experts see great benefits in the Vantage scoring system, most lenders still rely on FICO. Since FICO remains #1 on the credit scoring scene, you should focus more on your FICO score than your VantageScore. However, it is a good idea to ask your lender which scoring method they use so that you can determine what type of rate you may qualify for before applying for a loan.
While you may think that it is prudent to cancel old or unused credit cards, this seemingly harmless action can actually backfire and hurt your credit score.
“But how?” You may be wondering, as closing a credit card may seem like a financially responsible decision. Many people think that since closing a credit card will lower their credit limit, it will help them spend less or will make their finances easier to manage. Unfortunately, what people don’t realize is that canceling a credit card often directly affects your “credit utilization ratio” – your debt-to-credit ratio.
For instance, if you have a credit limit of $1,000 and have a balance of $800, your debt-to-credit ratio would be 8-10, which is considered extremely high. Ideally, you should try to spend between 10%-30% of your credit limit, and then pay off the balance quickly.
If your credit utilization ratio is high, credit agencies will consider you a financial risk, which can negatively impact your credit score. And even more bad news: your credit utilization ratio is the second largest component of your credit score – a whopping 30%. Therefore, keeping a low debt-to-credit ratio is crucial for maintaining a good credit score.
To understand how closing a credit card can affect your credit utilization ratio, consider this example: if you have three credit cards that, when combined, give you a $10,000 credit limit, and you typically only charge $2,500 to your cards each month, your credit utilization ratio is 25%, which is within the desired range. However, if you decide to close out one of these cards, whether because it is old or because you think it might simplify your finances, your credit limit will drop drastically.
Closing out a card with a $3,000 limit will now give you a debt-to-credit ratio of 2.5-7, or about 36%. So just by canceling one credit card, whether or not it is one you actually use, you have significantly raised your credit utilization ratio, thereby damaging your credit score.
However, there are certain instances when it makes sense to cancel your credit card: when your card is used fraudulently and the credit card company does not cancel the card and issue a replacement, or when you find a lower rate card and want to switch.
In these cases, it is still important to take precautions when closing old credit cards and opening new ones. First, make sure that the credit limit of the new card is equal to or higher than the one you are closing, as this will help ensure that your credit utilization ratio is not affected. Also, timing is everything when canceling a credit card. If you decide to cancel one, avoid doing so before applying for a loan in order to keep the interest rate low. Wait until after the loan is approved to close the card. And, of course, it is always important to manage your credit utilization ratio wisely to keep your credit score strong.
If you feel that having multiple credit cards is causing you to spend beyond your means, shred one of them or hide it somewhere deep inside your closet, just don’t cancel the card!
Why Students Should Start Building Good Credit Now
For many college students, the idea of establishing credit rarely crosses their minds; or if it does, they assume that credit is something that they won’t have to worry about until far after graduation. This isn’t the case, however, as building good credit during your years in school is crucial for preparing you financially for life after college.
Why Good Credit Matters to Recent College Grad
1) Employment Opportunities
Your credit score can start impacting your life immediately after college. Many employers conduct credit checks of potential employees, and a bad credit score could make you seem financially irresponsible, which could ultimately deter an employer from hiring you. If you choose to follow your dream of becoming an entrepreneur instead of finding a job right out of college, a good credit score is even more important. Most young entrepreneurs do not have the capital to successfully start their own businesses, and therefore must rely on receiving small business loans, which are difficult to obtain without good credit.
2) Living Situations
Aside from your career, your credit score also affects your day-to-day life. Unless you plan on moving back in with your parents, having a good credit score will help you find a place to live after graduation. Many landlords will conduct credit checks when you apply for a rental to ensure that you have a good history of paying off your debts, and a bad credit score could cause landlords to turn you away.
Finding a method of transportation can also be difficult when you have bad credit, as both leasing and buying a car is easiest and most affordable with a good credit score. Most recent grads do not have the cash to buy a car, which means that a loan is necessary. Not only does your credit score determine whether or not you qualify for a loan, but it also helps lenders decide on the interest rate of the loan. Establishing a good credit score while you are still a student can help you save money by avoiding high interest rates on car loans.
Ways College Students Can Build Good Credit
Many students are under the impression that they can only start building credit once they have a reliable source of income. Whether you work part-time at your school’s cafeteria or babysit occasionally on the weekends, you can (and should) start building credit immediately.
1) Ask your parents for help
Owning a credit card is a huge responsibility, as you must realize that every time you swipe the card, you are using real money that you are obligated to pay back. Because of the weight of this financial responsibility, students can ease into establishing credit by “piggybacking” on their parents’ account. The parents can monitor the student’s spending since the child is an authorized user of the account, and if the parents have good credit, the student’s credit score will also improve.
2) Apply for your own credit card
It is surprisingly easy for most college students to get a credit card, as many lenders assume that your parents will help you out if necessary. When deciding on which credit card to apply for, make sure to consider the card’s interest rate, credit limit, fees and penalties, and rewards program. Be extremely cautious when using your credit card, however, as many students tend to get carried away with spending when their credit limits are high. To avoid this, ask your credit card issuer to keep your credit limit low so that you can easily pay off any balances you incur.
3) Make small purchases
As a student trying to build good credit, it is important that you do not spend more money than you can afford to pay off. Try to keep your spending under 30% of your card’s limit, and use it mainly for occasional small purchases such as food, music, or movie tickets.
4) Pay off your balance every month
The most important step in building good credit is paying off your balance every month. When you are first trying to establish credit, it is a good idea to avoid carrying a balance on the card. To do this, though, you must be strict in your spending habits and only purchase things that you know you can afford.
College is not only a time to receive a good education and to learn how to live independently, but it is also a great time to start establishing yourself financially. Building and maintaining good credit in college can be easy and hassle-free if done correctly, and a good credit score can be invaluable after graduation.
We really strive to help and educate our National Credit Solutions customers and friends. Here are some books that we have written and/or recommend:
From the Nation Credit Solution family of business and self help writers:
This is the first book by the NCS president, Brad Boruk. Brad collaborated with Ray Clark to write this book in 2013. Brad and Ray share their insight on how to manage personal finances and how to recover when you are in a bad financial spot. Let’s face it, most of us end up in a bad financial spot at least once in our lives. This book will help you organize your finances and get back on track.
This book is only available from Amazon in a Kindle edition. The great news is that you do not need a Kindle to read the book. You can read if from most computers and iPads. Click on the picture of the book to go to the Amazon page for the book:
From other self-help and business writers we recommend:
The 21 Irrefutable Laws of Leadership by John C. Maxwell is an indispensable book on leadership. Click on the picture below to see the Amazon page for John’s book:
The Five Dysfunctions of a Team: A Leadership Fable by Patrick M. Lencioni is a leadership book that is recommended by Brad and Boiler. Both credit this book with inspiring their leadership. Click on the book below to go to the amazon page for this book:
At National Credit Solutions we are avid researchers and readers. If you would like to recommend a book not on this list, drop us a line: firstname.lastname@example.org
There seems to be a lot of confusion today about credit scores. Most of this confusion seems to primarily center around two things: 1) consumer report scores differentiating from mortgage scores and auto-enhanced scores, and 2) what factors influence credit scores. It sometimes seems that the consumer is purposely being kept in the dark.
Today, we’re going to take a look at the different types of credit reports and credit scores. While numerous types of credit reports exist (many of them are specialty reports), there are three basic types of reports: Consumer Reports, Mortgage Reports and Auto-Enhanced Reports. Here is a brief description of each:
Consumer Reports: This type of report is a great resource for consumers to monitor their credit. Consumers are entitled to one free credit report per year (this can vary depending on the state in which the consumer resides) and are available at AnnualCreditReport.com. When you pull this type of report, it’s considered a “soft” inquiry that won’t affect your credit scores; however, you typically can’t purchase goods or services with a Consumer Report.
Mortgage Reports: This is report that your mortgage loan officer would use to make a credit decision when you are purchasing or refinancing a home. This report normally contains the most thorough details, along with resource codes that spell out what factors are having the greatest effect on your credit scores. This type of credit pull is considered a “hard” inquiry and can affect your credit scores.
Auto-Enhanced Reports: When you go to an automobile dealership, this is the report that the finance department will use to determine your credit worthiness to purchase or lease a vehicle. As the name implies, the scores are enhanced based on your previous automobile payment history. If you have an excellent car payment history, your scores on this report will probably be higher than on the other reports. Conversely, if you have a poor car payment history, these scores may be lower than on the other reports. Because the purpose of pulling this report is to purchase a vehicle, this is also considered a “hard” inquiry and may affect your credit scores.
A few years ago, the Washington Post had an excellent article explaining that these three types of scores can vary by as much as 200 points! While I’ve personally never seen this much of a discrepancy, I have seen these scores vary by as much as 90 to 100 points. The good news is, the US Government has put the Fair Access to Credit Scores Act of 2010 in place to ensure that consumers now have access to various credit reports and credit scores if they were denied credit.
I hope this helps clear up some of the confusion that consumers face when confronted with different types of credit reports and credit scores. In the near future, I will be discussing what factors actually affect your credit scores, and what those affects are.
If you have any questions regarding your credit scores or your credit situation and would like to visit with someone, please feel free to personally contact me, Brad Boruk, at 214 504-7101.
FCRA-Certified Credit Strategist
National Credit Solutions