Millennials know a good credit score is vital to financial well-being in the modern world. However, it takes time, attention, and effort to get and maintain the loans and credit cards that will help millennials grow their credit.
This situation puts millennials in a tough spot because of their newness to the process. It is a chicken and egg dilemma because millennials are aware that they need credit but have trouble getting it due to their limited history, or as we call it in the industry a “thin-file”, which means that millennials need even more the access to credit.
But all is not lost. By taking these six reasonably simple steps, millennials can build their credit rapidly and escape the cycle.
1. Autopay Your Student Loan
Making regular, on-time payments to your loans is the best way to improve your credit. Even if you haven’t qualified for anything else, you can use this initial credit to “bootstrap” your way into other loans.
The best way to do this is to put your loans on autopay because regular, timely payments are a great way to boost your score. Even better, most loans give a discount on interest – usually in the 0.25 to 0.5% range – for loans that are paid via automatic payments.
While You’re At It…
Check to see if your loan statements offer electronic delivery rather than paper statements. In many cases, you can qualify for another small interest discount for signing up for electronic billing.
2. Get a Copy of Your Credit Report
You can obtain a free credit report from the three CRCs, TransUnion, Experian and Equifax, every 12 months. You should make a habit of getting yours annually for two reasons.
First, mistakes on your credit report are not unheard of. Review your report for poor reporting, identity theft, or any other factors that make your credit look worse than it should be. If you find some, contact the credit bureaus directly and begin the process of having those errors removed.
Second, reviewing your reason codes can help you to identify problems that are keeping your credit score down so you can take action to change things going forward.
While You’re At It…
See if any of your credit cards have credit monitoring or credit score-building benefits. Many do, even those for people with “starter credit.”
3. Take a Year Off From Applying for Credit
Applying for too much credit too often creates a downward spiral. How much new credit you’ve received or applied is one of the factors impacting your credit score. You can end up in a situation where you get denied credit in one place, then apply for a loan elsewhere, only to be denied because you previously applied unsuccessfully. Each new application makes your chances of success with the next application that much lower.
Instead, take a year off from applying for credit. Spend those months polishing your rating, making existing payments diligently, and paying down any credit card balances. At the end of the year, get back in the game with a much higher score and far better chances of getting the loans or cards you need at the APR you want.
While You’re At It…
Apply the debt snowball technique to your existing credit cards throughout your year off. It will further improve your credit score so that it’s in good shape when you return to action.
4. Pay Utilities With a Credit Card
Remember earlier when we mentioned how valuable making regular payments on loans and lines of credit can be? Here’s another hack to take advantage of this fact. It’s a little more complicated but works well.
For all of your utilities that allow credit card payments, set up autopay using the best card for the job. Then, set up an automatic payment of the full balance from your checking account to your credit card two days after the utility payment is due. Keep your checking account balance high enough for this to reliably work, and you’re all set.
While You’re At It…
Check the various rewards and rebate programs for all of your credit cards. You might find you’ll get more for paying your utilities, or other regular necessary costs like gas and groceries, with one card rather than another. Get strategic with it.
5. Consider a Consolidation Loan
First a warning: Many consolidation loans are nothing more than scams. They’re attempts to trick you into a high-interest loan that seems like a good deal because they reduce your total monthly payments but they end up costing way too much. Avoid these at all costs. Here’s how you can spot predatory lending.
That said, a large loan at a lower interest rate than your credit cards can be a smart move for two reasons. First, your monthly payment will be lower, which can reduce your financial stress and give you the flexibility to pay down debt strategically.
Second, it will speed up paying off the balance on your credit cards while adding a new loan to your credit report. That makes your overall available credit higher, which improves your credit score if it lowers your utilization ratio.
Nevertheless, after paying off the credit card(s) with a consolidation loan don’t fall into the trap of overusing the cards again. Make it a habit of paying off your credit card balances every month or you will wind up in a situation that is even worse than before you took out the loan.
While You’re At It…
Consider asking family members for that loan. You’re likely to get a lower interest rate than a bank will offer, and your “visible” used credit will be lower since family loans don’t show up on your credit report.
6. Use an App to Automate Your Budget
We’re not going to lecture you about the importance of making and sticking to a budget. You already know that. Instead, we’re going to tell you about how an app can help you do this.
At the most basic level, most banking apps offer an option that sends you reports showing where you spent your money each month. These reports help you see if you’ve stuck to your budget and where you have overspent and need to trim things to stay on track.
More advanced apps take it a step further by letting you know whether a purchase is within the confines of your budget – before you even buy it.
Final Thoughts
Don’t try to do all six of these steps at once. That can lead you to overload and burnout, which can in turn can lead you to giving up and ending up with the same credit score next year as you have right now.
Instead, choose the one step that’s most relevant to your life or seems easiest to implement. Make it happen this month. Once it’s set up and second-nature, take on a second one next month. Rinse and repeat until all six strategies are in place.
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