Millennials may be aware of the harmful effects of bad credit. Their difficulty is in determining ways to change habits and establish financial discipline that will improve their financial outlook and their credit scores. The following steps may show useful ways to carve a path to a brighter financial future.
1. Use Your Student Loans to Build Credit History
Establish a payment plan with your loan provider that works within your budget. Designate a specific portion of your weekly income for your monthly student loan payment. Stick to your plan and make your monthly payments in full and on time.
2. Get that First Credit Card
You have to have credit to build credit. Often, obtaining approval for a credit card may be difficult for young people. Credit issuers usually require a strong credit payment history and a good credit score. Without the track record, millennials may consider building their credit through a secured credit card which requires a deposit, generally equal to or less than the card’s credit limit. Payments must be made by the due date, as full regular payments factor in to most credit scores. Secured credit card issuers may “graduate” card holders with good payment histories to unsecured cards.
3. Check for Mistakes on Your Credit Report
If you’ve never checked your credit report before, now is the time. Consumers may obtain one free credit report from Transunion, Experian and Equifax every twelve months. You may notice a debt or payment was misreported or you’ve been a victim of fraud; either of which can be damaging to your score. By checking your report for mistakes, you can take the proper action to correct them.
4. Become an Authorized User
You may have the privilege of becoming an authorized user on a family member or friend’s card. However, the privilege has consequences. You must remember to make your payments in full and on time. If payments are not made timely, the credit card may be jeopardized, as well as the card holder’s credit reports and score.
5. Improve Your Credit Utilization Ratio
Lenders evaluate loan applications by an applicant’s credit utilization ratio. A major risk indicator for lenders is where credit card balances are compared to credit card limits. When balances reach the card limit, lenders perceive risk. To lower your utilization you may increase your available credit by paying down debt, getting another credit card or raising your current card’s limit; all of which improve the ratio between how much is available to you verses how much you’re actually using.
6. Don’t Close Old Credit Accounts
If you have an old credit card you no longer use or have already paid off, don’t be too quick to close the account. As long as it doesn’t have an annual fee, your unused credit line can help lower your credit utilization ratio and lengthen your credit history. Even just the smallest amount of activity can strengthen your credit as long as you remember to make the payments in full and on time.
7. Set Up Automatic Bill Pay Whether it’s for utility bills, insurance payments or a store credit card, sign up for automatic bill pay to ensure you’re making all payments by their due dates. You should still keep an eye on your accounts to ensure that payments have been applied timely and accurately.
If you have questions about your credit score, or errors on your credit reports, contact us to learn more about steps you need to take.