The lenders categorize the credit scores into several segments, which denote how risky it'd be to approve credit to an individual. Apart from loan or credit approvals, credit scores can also affect lending terms, such as applicable interest rates. The higher a person’s credit score, the lower his/her quoted APR will typically be.
Credit scores can be categorized in the following divisions:
- 720 or more: Excellent
- 660 - 719: Average/Fair (Prime)
- 620 - 659: Poor (Near Prime)
- 620 or lower: Bad (Subprime)
As per a report released by the Corporation For Enterprise Development (CFED), the majority of the population or 56% of the consumers have subprime credit scores. In general, younger Americans are more likely to have “subprime credit” (as described by TransUnion). There are few factors like age, spending habits and others that make the young people deprived from good credit score.
Let’s check out why millennials have subprime credit:
1. Credit utilization
One big reason is that millennials use too much of their available credit. As per the TransUnion it is nearly 79%. Credit utilization plays a major role in credit scoring. So, if a person who earns $1000 in a month and pays off $790 in debt, his debt-to-income ratio will be quite high. As a result his credit score will fall through time.
2. Credit history
Having a long credit history is very important. It is one of the deciding factors in credit scores - the older the credit history you have, the more it’ll provide benefits to you. As millennials are the young generation, most of them lacks of long credit history.
3. Credit mix
Consumers have two types of debt, a) revolving and b) installment. Revolving debts consists of debts with variable payments per month, like - credit card debts. Installment debts consists of fixed installments like mortgage or car loan. Millennials have to maintain a good credit mix and divide their debts in different types. If they don’t, it’ll affect their credit score badly.
How millennials can build their credit score again
So if you’re a millennial with subprime credit, there are few things you need to do to improve your credit score again:
a. Lower your credit utilization
Use less of your available credit (try to maintain the max credit utilization ratio of 30% or less).
b. Make on-time payments
Make payments on time and if possible in full. It’ll keep away negative items from your credit report.
c. Maintain credit accounts for a long time
The older you maintain your accounts, the more they’ll help you to improve credit score. Keep your accounts open even if you don’t use them often. Trust me, it’ll be beneficial.
e. Diversify your debts
Spread your debt across revolving and installment debt accounts.
f. Get help from other parties
If you are facing credit issues, you don’t have to tackle it alone. You can ask help from professional agencies who can manage your accounts, review your credit, settle issues with the credit bureaus and lenders.
g. Get rent payments reported to credit bureaus
By this way the credit bureaus will be informed about your regular rent payments. As a result, it may help your credit score to grow.
Millennial credit scores are affected because of bad financial habits, age, and short credit history. However, through smart credit habits, millennials can manage their financial issues and take control of their credit. It’s not easy to pull ourselves up from the subprime credit level, but if we work wisely and understand all the possible actions, we can build a great credit score through time.
Read more:
How to manage your credit cards in 2017
7 ways to improve credit score while having burden of debt on your back