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Millennials Struggle to Build Credit — Is It Because They Avoid Credit Cards?

July 16, 2014
Credit Score
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Millennials have it rough. A spotty job market after a lackluster recovery from one the the worst recessions in modern history has dealt this generation a less-than-fair card. It has also dealt this generation a less-than-stellar reputation when it comes to credit, debt and managing finances. So it’s no wonder that this is affecting the ability of people in their teens and 20s to manage their credit scores.

Millennials struggle to build credit scores: The good and bad news

According to a report published by Experian late last year, Millennials have an average credit score of 628, the lowest of any age group in the country and over 50 points lower than the national average. They’re tied with Generation X (ages 30-46) for the highest average credit card utilization at 37%. But there is a silver lining: Growing up in a tough economic climate means that Millennials are more aware of their debt and what it means to be in the red. This has led them to have the second-lowest level of overall debt in the nation, averaging around $23,332 per Millennial. Because of this debt awareness, Millennials sit on a debt mound only slightly higher than debts acquired by the Greatest Generation (ages 66 and up), despite the heavy student loans young adults have accrued in recent years.

So how does it happen that Millennials have relatively low debt and credit balances, but lower credit scores than the rest of the country?

Millennials’ struggle tied to credit cards

Or, more accurately, Millennials have short credit histories. According to Experian, the average number of credit cards for this generation is 1.57, lower than any other group. This means that young people haven’t yet had time to build up a good reputation with credit bureaus for one of two reasons: They haven’t been cardholders for long enough to establish a decent credit score or they haven’t opted to use credit cards.

Millennials also have lower credit card limits than most other generations, probably because those who do have credit cards are so new to the game that their card issuers don’t trust them with a huge credit line yet. This, combined with the financial struggles associated with finishing college, finding a job and becoming self-dependent can lead to extended periods of time at the credit limit and missed or late payments. Add this to their short credit histories and Millennials are in for trouble.

Ways for millennials to improve their credit scores

There are ways for Millennials to help improve their credit scores, though. When it comes to handling any type of borrowed money, there are certain things to keep in mind:

  • Making payments on time accounts for about 35% of the credit rating, and if a payment is more than 30 days late the lender can report it. This means it’s important to prioritize paying on time!
  • Paying your accounts in full is ideal, but just meeting the minimum requirement will help.
  • Credit utilization makes up a large portion of your credit score, so increasing available credit either by paying down debt or having your credit limit raised will improve your digits

The takeaway: Avoiding credit cards might be the hip new thing, but when it comes to building credit, using this type of plastic is key. If you spend within your means and pay your bills on time, you shouldn’t have to worry about any of the pitfalls that come with them. Get to smart swiping today!

Millennial image via Shutterstock