The Kids (Credit Scores) Are All Right

Which generation has the lowest average credit score? According to this article, it’s the Millennials, who have a 625 VantageScore vs 650 for Generation X and 709 for Baby Boomers. This is unfortunate since Millennials are the most likely to look for a new job or buy a home, which are two of the situations when having good credit can be most important.

Does this mean that Millennials are the most irresponsible with their money? It’s the easy answer (kids these days!) but it’s not necessarily true. In fact, our own generational research shows that Generation Xers actually struggle more than Millennials with day-to-day money management. (Having kids and a mortgage doesn’t exactly make it easier to pay the bills.)

One of the main reasons that Millennials may have lower credit scores is simply because they’re younger and thus have shorter average credit histories. The length of your credit history determines 15% of your FICO score and is the 3rd most important factor overall, after your payment history and the total amount of debt you owe. All things being equal, Millennials would have lower scores based on that alone.

If they don’t have much of a credit history, Millennials might want to consider opening a credit card to start building one. After all, your credit is like your resume. The only thing than might be worse than having a less than perfect history is not having a history at all. If they have trouble opening credit in their name, they can start with a secured credit card backed up by a cash deposit or have someone co-sign with them.

If they do have credit cards, they should be wary of closing the oldest card since that history will eventually drop off their credit report once it’s closed. Instead of closing cards, they can ask if they can convert any high fee cards to no fee cards or even shred the cards if they’re worried about running up debt. Of course, to build and maintain a good credit score, they’ll also want to do the same things as everyone else:

  • Check your credit reports (which you can do for free every 12 months at annualcreditreport.com) and dispute any errors that could be hurting your scores.
  • Set up automatic payments to make sure your bills are paid on time.
  • Keep debt down and ideally below 30% of your credit limit. If you’re having trouble making even the minimum payments, consider working with a non-profit credit counseling agency.
  • Avoid frivolous credit inquiries and limit rate shopping for a mortgage to within a couple of weeks so they only count as one inquiry.
  • Finally, use sites and apps like Credit Karma and Credit Sesame for free credit monitoring and customized tips on improving your credit score.

Millennials may have the lowest credit scores but that doesn’t necessarily mean it’s all their fault. Even better, by following these steps they can eventually be the generation with the highest credit scores. At least that is until those kids and mortgages come along…

 

More like this:

What’s Your Plan For a Financial Independence Day?

What’s Your Plan For a Financial Independence Day?

I personally think of financial independence as consisting of three different levels: ...
Read More
Which Federal Tax Breaks Still Apply To College Costs?

Which Federal Tax Breaks Still Apply To College Costs?

When it comes to education, most financial planning centers around saving and investing for college. This focus makes sense because ...
Read More
The No-Tracking Budget

The No-Tracking Budget

Putting together a budget is one thing, sticking to it is another ...
Read More

Subscribe

Be the first to know when new resources are published.