Credit Score 101 for Millennials

When that glorious day finally comes where a millennial finally finishes their schooling and they start their career in the workforce, it is a day to remember for that individual and their parents. Even if that millennial starts working close to home and continues to live with their parents, it is still nice knowing that they will start becoming closer to independence and have an income to start paying off all the debt they may have accumulated over the years. And after a year or two in your parent’s basement, fewer things will motivate that millennial more to save up some money and buy a place of their own to re-obtain the freedom they might have had while being away at college. In order for someone to get approved for a mortgage, not only do they need an income and money for the down payment, that person is also required to have credit. So the question is, how do you obtain credit and how do you make sure your credit score is high enough to get approved for a mortgage?

Your Credit Score and Report

A person’s credit score can range from 300-850. Obviously, the higher the score, the better off you are and more likely it is you will be able to get approved. The most common items that affect a millennial's credit score include student loans, car payments, and credit cards. The general rule of thumb is that your credit score should be 600 or above to receive a mortgage. For millennials that have fewer years of credit, it is common to start out with a score between 600-650, assuming you make all of your payments on time. As you have credit for a longer length of time and continue to make your payments and start paying debts off, your score will gradually start to increase. Once you get a score above 700, you are in a good place and the best market interest rates will most likely be available to you. However, just because your score is above 600 does not guarantee you can get approved. In addition to a credit score, you also have a credit report that goes along with your score. The credit report basically breaks down all your current and previous debts you have ever had along with all of the details of that debt. This includes if you ever missed a payment, refused or couldn’t make your payments, if you have paid the debt off or you still have a remaining balance, and things related to that. For example, if you had a car and you could no longer afford the payments and it went into delinquency, that will show up on your credit report and will actually prevent you from getting a mortgage in some cases.

How to Improve your Score

In order to improve your credit score, the most important thing is simply to pay all your debts on time. In addition, you have to be paying at least the minimum amount due, otherwise making small payments on time doesn’t do you much good. Although debt is generally considered bad and unwanted, it does actually serve a purpose. That purpose is when you take out a loan whether it’s for a new car, student loans, etc..., by making your payments on time, it shows that you are responsible in managing your money so banks will be more willing to lend you money because you make your monthly payments on time and it is likely that the lender will make all of their money back on top of the interest collected. So while you are crying about all the student loans you took out, try to spin it to a positive thing by saying you are building your credit and being responsible. Unfortunately, that can be a big price to pay so good luck trying to say it is worth it!

Having a large amount of debt can actually be more harmful to your credit score than helpful. Basically, you want to have some debt to show you can be trusted in paying it back but not so much that the person lending the money is afraid you won’t be able to afford paying that person back, especially if they lose their main job or income. By having a longer length of credit history, fewer lines of credit open to you, and not opening many lines of credit all at the same time such as applying for two credit cards and taking out a loan for a boat all at once, your credit score will eventually climb to a score you are proud of.