By Rebecca Gordon
Of the last three generations, millennials have some of the highest debt, but the lowest credit scores.
Credit reporting agency Experian lists an average millennial credit score rating of 625. A solid placement of the group in what credit lenders consider the poor to mediocre range.
Credit scores and credit history have effects on abilities to qualify for loans: car loans, home loans, student loans. Understanding what affects credit scores is the first step to building it up.
Most college students don’t know very much about what determines their credit score, according to Harriet Hughes of the University of Michigan Credit Union. She offered a brief overview of credit: what it is, why it’s important, and what affects it, either negatively or positively.
Credit is borrowed money. The different kinds include car loans, credit cards or rental history. A credit score, however, is essentially a determination of the likelihood that a person would repay the loaned or borrowed money to the institution.
Hughes poses the question like this, “What is the risk?”
UMCU offers workshops on financial education. In the past, Hughes would educate members and students about how scores are created, what affects them and how to avoid the perils of credit.
“We go through the five factors of credit,” said Hughes.
Those five factors are payment history, credit utilization, length or age of credit, new credit and kinds of credit.
“Payment history. If you have great credit and you pay your bills on time, every time, it’s like 35 percent of your score for the most part,” Hughes said.
The flip side that, late payments, often or alone can tank a person’s credit. Hughes estimated a late payment on a credit report can affect a score by anywhere from 50 to 100 points.
“The good part is that you can repair it. By making your next 12 or 24 months of payments on time your score will go back up.”
Another tremendous chunk of credit rating comes from credit utilization or how much is owed. Credit “capacity,” as UMCU calls it, accounts for 30 percent of how credit scores are determined.
One of the best possible percentages for utilization of credit is around seven percent, according to credit score company FICO. Ten and 20 percent are considered acceptable, but beyond that is trickier ground.
One of the things UMCU teaches in their financial education sessions is how to build credit at a young age. Credit history, or how long a person has had credit, affects 15 percent of their credit score.
An avenue to build credit within a safety net is the option of becoming an authorized user on a parents credit card. Parent’s set financial limits, can monitor spending, and their child builds up a credit history and score.
This may be the only option for some college students as the
Credit Card Act prohibits anyone under the age of 21 from opening a credit line without a co-signer, or proof of independent income.
The two final factors of credit scores are new credit and types of credit. New credit reflects how many new lines of credit a person has recently applied for. Too many at once can send the wrong signal; that the person is desperate for funds.
Types of credit, indicate whether all the credit score comes from credit cards, car loans, or any other varieties of credit, and can reflect well in the right combination.
Both factors account for ten percent of credit determinations.
While credit reports are not indelible, they affect more for longer than one would imagine. Scores can affect getting a job, insurance rates, and getting approved for credit at all.
Hughes suggests researching well before applying for credit. Researching what you are capable of, what the institution is like, and if a person is struggling what is that institution going to do to help.
“Bad credit sometimes happens from situations beyond our control. There is sometimes nothing anyone can do about it. It’s going to happen,” Hughes said.
But credit doesn’t have to be an intimidating thing. It’s smart to remember that it isn’t free money but there are avenues to help younger people build their credit.