Thrifty Thinking: Millennials and Credit

Experian recently revealed the results of a survey regarding millennials and credit. About two-thirds of millennials have questions as to how their credit scores are created and despite being associated most closely with student loan debt, credit card debt takes first position as the most common millennial debt. I had a chance to interview Rod Griffin, Director of Public Education for Experian to learn more.

Why are millennials so unaware of how debt affects credit rating?

There are a number of contributing factors. The concept of utilization is often misunderstand by older and more experienced credit users, so in that way millennials are probably no different than much of the population. They are young, so it may be inexperience or simply not exposed to the concept of debt. Older millennials also developed an aversion to credit, particularly credit cards, during the economic downturn, so many had no visibility to the impact of debt on credit scores. Additionally, the CARD Act effectively prohibits anyone under age 21 from having a credit card account without a cosigner, further reducing millennials’ experience with the concept of utilization and credit scores.

What do millennials need to consider in terms of type of debt?

All types of debt can help build a positive credit history. The key to good credit scores is how you use the credit available to you, not how much you have or even what types. However, one or two revolving credit accounts (credit cards) can help improve credit scores a bit more quickly. The reason is that the borrower decides how to use a credit card. Do they charge to the limit or only make a small purchase or two? Do they pay the full balance or just the minimum due? Because the borrower makes those decisions, revolving debt gives somewhat greater insight into their credit management decision making, which in turn gives greater insight into lending risk.

How can young adults manage credit card debt?

There are two crucial things millennials, and anyone else, must do to have good credit. First, you must pay your bills on time every time. Payment history accounts for between 30 and 40 percent of the credit score. Second, they must keep their balances low as compared to their credit limits. The recommendation is that credit card balances be no more than 30 percent of the credit limit on any individual credit cards or in total. This can be a challenge for millennials, who often have credit cards with very low credit limits. Ideally, a person should pay their credit card balance in full each month, regardless of their generation. When building credit, making a small purchase each month to ensure a credit card is active. Paying the bill in full can help build a positive credit history when just starting out.

What are some of the most important financial priorities for young adults?

Young adults face a number of credit and financial issues. Student loans are a major concern for many today. But, normal day-to-day expenses are also important. Paying rent on time, for example, can help build a positive credit history. Failing to pay utility bills, cell phone service or other monthly expenses could result in collection accounts that damage your credit history. This history can play a part in renting your first apartment, buying a car, and getting a cell phone. Your credit history also may be considered when applying for your dream job – but not your credit scores. Employers do not receive credit scores.