According to an analysis of over 10 million users performed by credit bureau TransUnion, almost half of millennials (Americans age 18 – 36) have “subprime” credit — meaning a credit score that is below 600. A score below 600 is low enough to give many lenders pause before extending a line of credit to an applicant. Contrast this with older Americans — such as baby boomers — and there is a stark difference, with older generations much more likely to land in the “Super Prime” rating level — TransUnion’s highest rating tier.
Low credit scores can cause major financial headaches for millennials. Challenges that people with subprime credit scores face include:
- Denial of credit card and loan applications
- Inability to lease an apartment
- Roadblocks with potential employers who issue credit checks
- Higher interest rates
Why Many Millennials Have Subprime Credit
There are a number of reasons millennials may have, in general, worse credit than older Americans and are more likely to have what TransUnion describes as “subprime” credit. Some of these factors are simply due to age, and others are due to millennial spending habits.
One large reason, claims TransUnion, is that millennials are using too much of their available credit. At 79%, millennials have too much of their credit lines tied up in debt. Credit utilization is a big part of credit scoring. A simple example: a millennial with a $1,000 maximum credit card is carrying a $790 balance — now extend this example across all lines of credit the individual holds. This is far too high of a debt utilization ratio.
Another reason is that a long credit history is important. Account history plays a factor in credit scores — the older the average age of your accounts, the more it benefits your credit score. As millennials are on the young end of the spectrum, they naturally have young accounts that don’t benefit their credit in this way.
Finally, debt comes in two types — revolving and installment. Revolving debt has no set payment amount and is simply a line of credit with a limit — such as a credit card. Installment debt usually comes with a set beginning and end date, with fixed payment amounts — such as a car loan or mortgage. Millennials have less debt spread across different types, and this can negatively impact their credit.
How Millennials can Improve their Credit
So if you’re a millennial with subprime credit, what can you do to improve your credit score? A few key things:
- Low Credit Utilization: using less of your available credit (a max credit utilization ratio of 30% or less is ideal).
- On-Time Payments: making payments on time and in full keeps negative items from appearing on your credit report.
- Let Your Accounts Age: the older your accounts, the more they help your credit score. Keep your accounts open – even if you don’t use them often – to reap the benefits.
- Diversify: spread your debt spread across both revolving debt and installment debt accounts and loans.
- Get Help: If you are having credit problems, you don’t have to go it alone.com can work with you to review your credit, work with the credit bureaus and lenders to improve your credit report, and then provide you monitoring and tracking to see your progress. Find out how the process works here:https://www.creditrepair.com/how-credit-repair-works
Some factors affecting millennial credit scores are simply due to age and credit history — of which, naturally, millennials have much less. However, through smart credit habits, millennials can take control of their credit and pull themselves up and out of the subprime level. It all starts with understanding credit and what actions build a great credit score.