Financial editor of NBC’s Today Show and financial expert Jean Chatzky writes about credit cards all the time. Just last week she wrote about varying credit cards, how to know one from the other, and how to move them all in the right direction.
But, she points out in her latest article, choosing credit cards and managing them all is much easier if you “get off on the right credit foot initially”. And unfortunately, that's something many millennials aren't doing right now.
And it’s not because they’re irresponsible young adults still depending on Mommy and Daddy and racking up debt on frivolous things and then forgetting to pay the bill at the end of each month. On the contrary. According to Experian's 2013 State of Credit report, released late last year, baby boomers are actually the ones that tip the high end of the scale. They carry an average balance of $5,347 on their (again average) 2.66 credit cards. Millennials carry $2,682 on their 1.57 cards. Gen Xers and members of the Greatest Generation fall somewhere in between. Millennials aren't even highest when it comes to late payments—that dubious honor goes to the Xers.
And yet, Millennials’ credit scores aren’t reflecting the same fiscal resposibilty. A just 628, millenials’ scores have the lowest average on the list. They're more than 100 points lower, on average, than the Greatest Generation at 735. (Boomers average 700 and Xers 653, for those of you looking to see where you measure up.)
So what's the problem? Utilization. This factor—defined as the percentage of credit you have available to you that you're actually using—is responsible for about one-third of your credit score. Ideally, you want to keep that percentage under 30%. Millennials are at 37%.
Looking at these stats, it's clear that if millennials had more cards in their wallets—but continued to use them sparingly—they'd have substantially better scores. And those better scores would help them get better rates on auto loans, mortgages, insurance, and other credit cards going forward. In other words, they'd save them real money, creating a cycle of funds that will help them a lot in the long-run.
Chatzky has a few suggestions for parents on millenials who want to help them start out on the right foot and/or for millenials themselves to follow as they consider their credit scores:
Get a credit card. Or help your child get one. "All the parents who are weaning their kids away from credit and forcing them to use debit cards are [making a mistake]," says Maxine Sweet, vice president of consumer education at Experian. "Just like you need academic credentials you need credit." Under the Card Act, if you're under 21 you're not supposed to be able to get a credit card unless you have the income to prove you can manage it or can get someone over 21, a parent being a likely choice, to co-sign, Chatzky points out. She also points out that she’s not a fan of co-signing, but there is another way: Add a child to one of your own credit cards as an authorized user. Just make sure that the issuer will report on behalf of the child to the credit bureaus.
Understand how much you can/can't use the cards you have. As Chatzky points out, 30% is the line when it comes to utilization. If you can see you're going to cross it, either request an increase in your credit limit or—if you've proven to yourself that you can handle having credit—get a second card. (You'll want to use that one, too, but sparingly. Just enough so that the issuer doesn't quit you. Then be sure to pay it off entirely every month.)
If the thought of getting another card rubs you the wrong way and you know your utilization is creeping up there over the course of your monthly billing cycle, try this: Pay your bill in-between. Sweet explains that'll reset the clock and help boost that portion of your score. If you're carrying a balance, it'll save you some scratch on interest as well.