After the ‘Great Recession’ of 2008, it makes sense that we as millennials are cautious with our finances. We do not want to make the same mistakes that our parents made by borrowing too much without the means to pay it back.
Millennials are building better credit habits and learning how to use credit wisely. According to Pew Research, after the recession, “from 2007 to 2010, the median debt of households headed by an adult younger than 35 fell by 29%, compared with a decline of just 8% among households headed by adults ages 35 and older.”
With an experience like the recession close in the rear view, it is no wonder that millennials are building better credit habits.
Here are 4 ways that millennials can build credit.
Opening and using one card is the best way to start building credit. Open a secured credit card to begin building a solid credit history. Start by charging one monthly recurring bill, your cell phone bill for example. In order to build credit, you have to use credit.
When you start using the card, your usage and payment history is reported to the three credit bureaus; Experian, Equifax and TransUnion. Charging a small monthly bill will ensure that you are able to pay you credit card balance in full.
Pay in Full
Now that you have a credit card, it is important to maintain a low utilization balance. The easiest way to do this is to pay the card in full each month. Set up automatic payments and pay the balance in full or in part the day before the due date.
This is a trick that I learned to help keep your utilization balance low. Your balance is reported once a month. Even if you use 59% of your available credit, as long as you pay the card right before the statement is issued, the report to the credit union will show a low utilization ratio.
I have personal experience with this. It’s easy to think that just because you have a credit card, you can make impulsive purchases.
Don’t do it!
Impulse shopping is the easiest way to run up a balance that you can’t pay off. If you feel like you have a hard time controlling the urge, leave your card at home.
I once froze my credit cards in a block of ice to keep myself from using them. Do what you have to do in order to create the habit of charging only what you can pay off and no more.
Trust me on this one.
Including your credit card as a part of your budget is the easiest way to stay on track. If you are having trouble creating a budget, get the Young Finances toolkit. There is a step-by-step guide to creating a simple budget that you will stick to so you can reach your financial goals.
Finally, remember that building a positive credit history takes time. You need at least 12-18 months positive reporting to begin seeing the results.
Percentage of on time payments, utilization ratio, and average age of accounts are the three most important factors in earning a good credit score. You want a high percentage of on time payments, a low utilization ratio and a high number for average age of accounts.
Building these factors takes time.