When it comes to credit scores, Millennials are lagging behind. Compared to Generation X and Baby Boomers, Millennials have the lowest credit scores, according to a recent study from Experian.
Using Experian’s VantageScore 3.0 scoring model, where scores range from 300 (lowest) to 800 (highest), Millennials (here defined as adults between the ages of 19 and 34) carry an average score of 625, which would be considered fair. Generation X, by contrast, has an average score of 650, while Baby Boomers have an average score of 709.
While that may sound alarming for Millennials, it actually makes a lot of sense. There are a number of key reasons why young adults are the least appealing demographic to lend money to. And while you could argue that those poor scores really aren’t their fault, there are definitely a few things Millennials need to change if they want to develop superior credit in the coming years.
What's a Millennial?
The group we now call Millennials – those born in the 80s and 90s, who came of age in the new millennium – used to be known as Generation Y. The name didn’t stick, because frankly it wasn’t much of a name.
The previous generation had been Generation X. That name was created by Hungarian photographer Robert Capa, who used it as a title to a photo essay about the post-Baby Boomer generation. Capa considered the new, post-World War II generation to be so distinctly different from their Baby Boomer parents as to be unknowable, almost undefinable – thus “Generation X.”
Millennials, however, are not simply Generation X: Part II. Like their parents, they’re wholly different from what came before, and even their finances reflect that.
A different financial world
There are two substantial differences between the financial landscape Millennials face and the one their parents faced 20 years earlier.
For starters, the Credit CARD Act of 2009 has had a profound impact on how young people interact with credit. Credit card companies are now severely limited in how they can to market their products to young adults, while consumers under 21 can’t open new credit accounts without a parent cosigning the account or proof that they can repay the debt on their own.
Partially because of the CARD Act and partially because of changing opinions about debt, fewer and fewer young adults are using and relying on credit – only 27 percent of Millennials’ recently opened accounts are credit card account. Meanwhile, in 1998, nearly half of all new accounts opened by members of Generation X were credit card accounts.
Millennials aren’t debt-free, however. In fact, they’re more likely to have student loans and auto loans than their parents were at the same age.
Work to do
Lenders love consumers with a long credit history, so it makes sense that the youngest consumers would have the lowest scores.
That doesn’t mean Millennials can just sit back and wait for their credit scores to go up, though. There’s some serious work to be done.
To begin, Millennials who don’t utilize credit cards should start. It doesn’t have to be all the time, and you should strive to pay off your balance at the end of every month, but it is important for your credit score to show that you can successfully manage many different kinds of credit accounts.
It’s also significantly important to keep all credit and loan accounts in good standing. That can be difficult when you’re young and not making a lot of money, so be sure to use all available tools and resources. If you’re struggling with student loans, speak to a student loan expert or counselor. If you need help building a workable budget, speak to a budget counselor.
Millennials face a different world than the one their parents and grandparents faced, but when it comes to good credit, many of the same rules apply. Using credit wisely is still the best way to build your credit, so don’t be afraid of credit. Be smart. Be cautious. But don’t be afraid.