What Millennials need to know about credit scores

by Shelton on May 31st, 2014

filed under Credit Scores

Recent surveys have indicated that the Millennial generation, those 18 to 34 years old, have adopted prudent, frugal habits when it comes to money.

They shun debt, tend to use cash, and see the value of saving money. Coming of age amidst a near-economic collapse and resulting Great Recession will form those kinds of attitudes.

But a new survey shows one area where Millennials come up short financially. Theyre pretty much in the dark when it comes to their credit score and why it is so important.

The survey by the Consumer Federation of America (CFA) and VantageScore Solutions, LLC shows Millennials know less about credit scores than other adults. They know less about the businesses that use the scores, less about who collects information on which the scores are based and less about how scores can be improved.

Bad information

For example, they are more likely than other adults to think that credit repair companies can always or usually be useful in removing errors and improving scores. In reality, the best way to raise a credit score is to pay your bills on time.

Because of this knowledge gap, Millennials are less likely than other adults to take advantage of the federal law that allows you once a year to get free copies of your credit report from all three credit reporting agencies.

Obtaining their free credit reports not only allows consumers to check the accuracy of the reports but also appears to motivate them to learn more about credit scores, said CFA Executive Director Stephen Brobeck.

Looking in the wrong places

Because of a lack of knowledge or awareness about credit reports, Millennials may also be prone to look in the wrong place for their credit report. There are a number of commercial services that offer credit reports some even saying its free, but there is always some service you have to sign up for in order to obtain the report.

The easiest way and the way with no strings attached — to obtain a credit report is to visit www.annualcreditreport.com or call a toll-free number, 877-322-8228.

What else should Millennials know about their credit score? For one thing, having and using some credit is helpful to your credit score.

For example, if you have a couple of credit cards and charge a few regularly-budgeted items like groceries and gasoline each month, it helps your credit score if you pay the full balance each month. That last part is important.

Responsible use of credit

Credit agencies look at how much credit you have and how you use it. If you carry a credit card balance, the credit card companies will love you but it lowers your credit rating. Paying off the balance in full each month tells creditors you use credit responsibly.

Millennials should also know that that credit card issuers and mortgage lenders will use these scores when deciding whether or not to extend credit and at what rate. The better your score the lower your interest rate.

Experian, the credit reporting agency, offers a couple of other points of credit advice. Only apply for a new credit account when you need it. Dont open an account just to get a discount on a purchase.

Also, Experian says you should not open accounts just to have a better mix of credit. In fact, it probably wont help you score.

Balance transfer cards dont help

Balance transfer credit cards are a popular way to reduce credit costs but moving credit around doesnt help your score. Better to pay off debt rather than move it.

Dont close unused credit accounts thinking that will help your credit score. In fact, it is likely to have the opposite effect. Owing the same amount of money but having access to less credit will lower your credit rating.

Millennials, by and large, dont kid themselves about their credit knowledge. Only 40% think they have good or excellent knowledge about credit scores, while 62% of those 35 years and older think they have this knowledge.

The survey did identity a group of Millennials that actually possesses a lot of credit information. Those who have obtained their credit reports know more about credit scores than those who havent.

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