Life as a millennial can be tough. Especially if you live in an expensive city like London, where the cost of living can make life difficult if you are on a lower income, which many of us are when we are young and fresh out of school. With student loans and debts to pay off, high rent prices and other bills it can be hard to save and many of us are living paycheck to paycheck.
Unfortunately, this means that the average credit score for a younger millennial (aged 22 to 28) is only 652 out of 850. While this is considered a good score, it’s not great, and certainly not a rating that guarantees you acceptance for loans, credit cards or mortgages. It’s also important to note that this is just an average. It’s thought that around 40% of millennials have a poor score and that almost half of the generation feel like their credit score is holding them back from moving forward with their lives.
Others, of course, aren’t worried. They are in their early 20’s. They feel like they are meant to have debts. That loans and credit cards are just a normal part of early adulthood. Or, even like it doesn’t matter yet because they’ve got ages to repair their scores, pay off debts and save money. It’s okay to live in poor quality, overpriced rentals while you are young, there’s plenty of time to worry about buying a house later on in life.
But, this isn’t the case. In your early 20’s it can feel like you’ve got a lifetime ahead of you. But, the reality is that a poor credit score this early in adulthood could affect you for the rest of your life. You won’t get approved for loans and credit cards. If you’re in debt already, your chances of buying a home in your lifetime are already decreasing, as expensive rent and your inability to get a good mortgage rate means that you’ve never got chance to save the money that you need for a deposit.
That said, it is possible to build a strong credit score, or even take steps to repair poor credit, in your early 20’s, and it’s definitely worth doing. A strong credit score now can mean that you are able to borrow money when you need to, at reasonable interest rates which you can pay back. This can mean that even when you borrow, your score stays high. You’ll also have a much better chance of being approved for a mortgage when you are ready to apply and that many financial doors are open to you, for the rest of your life. Here are some of the steps to take to build a good score, while you are young.
Understand Your Credit Score
The first thing that you need to do is understand what credit scores are and how they can affect you. In very basic terms, your credit score is a number between 300 and 850, that gives lenders an idea of how well you repay debt. If you’ve got a high score, lenders see you as someone that knows how to manage money and can be trusted to make repayments on time. They are more likely to lend you money than someone with a lower score.
This score is based on factors affecting your finances, such as debt levels, and on your credit history. Agencies like Experian compile your history, looking at your complete financial background, to come up with a score.
Once you understand credit scores in general, it’s time to check yours. You can do this for free online. But, it’s vital that you don’t just look at the number. Take the time to read through the report and look at any negative factors affecting your score. When you know what they are, it’s much easier to fix them.
Remember, No Credit is Almost as Bad as Poor Credit
A big problem that young people often have is that they don’t have any credit. So, there’s nothing to check. There’s little background with which to judge a person’s ability to repay debt. But, without a credit history, it can be hard to start building up credit, as you are often turned down when you make applications.
Believe it or not, getting a credit card when you are young can be a good thing. You should be able to get unsecured credit cards for bad credit, and as long as you can afford it, don’t rely on it and pay off the balance as soon as you can, it can help you to build your score. Just remember, to avoid interest, you’ll need to pay the balance in full every month.
Set up Standing Orders
One of the worst things that you can do for your credit score is missing payments. So, make sure you set up standing orders for your credit cards, but also for things like mobile phone bills and utilities. If you need to, set up a standing order for the minimum payment, so that you know that you won’t miss it. Then, pay off more when you can afford it.
Never Get Near Your Limit
Using all of your credit limit on an account, or getting anywhere near it, is a factor that can bring your score down. Stay under 50% of your limit, and it will never count against you.
Keep Accounts Active
When you’ve paid cards off, and you don’t need them anymore, you might think it’s best to close the account. But, as soon as it’s closed, it stops counting towards your score. Cut the card up but keep the account active and it will help you to build up a credit score.
Don’t Apply for Too Much Credit
When you are young and working, you get credit card applications through the post most days. They’ll all tell you that you have been pre approved. But, they’ll still do a credit check, and every check made brings your score down. Only apply for what you absolutely need, and never apply for things that you are unlikely to get.