Millennials and Credit: Avoiding Baby-Boomer Missteps and Miscues
(part of an ongoing series from Sabrina Anthony, Director of Online Media and mother of a Millennial)
In my previous posts, I have discussed how my husband and I are financially educating my son, a freshly-minted, new-to-the-workforce Millennial. I expected the journey to be filled with ups and downs: so goes life.
Well, my millennial son received his first credit card – and proceeded to max it out.
He came to me to express how his credit card wasn’t working and that he needed to call the bank. I asked him to pull up his statement on his phone to look at his account (as with most Millennials, he is a mobile banker). Lo and behold, his available balance was $900.00 but his account balance was $915.00. His understanding of ‘paying over time’ amounted to three payments totaling $90.00.
At this rate he would pay this off in about ten years.
It was time for a lesson in ‘Credit 101’.
I immediately told him to transfer from his checking account enough money to bring the balance down to a third of what he owed and to begin paying his credit balance off each month.
According to a recent Bankrate survey, 63% of Millennials don’t have a credit card, compared to 35% of consumers over age 30. I think this is a major financial misstep for the Millennial generation: establishing good credit by using credit cards responsibly can influence whether someone will qualify for a good interest rate on a car loan, for auto insurance, a mortgage – and sometimes, even a job.
So how does one begin building credit responsibly?
In building solid credit, consumers should strive to reach a credit rating between 650 and 750 on the 350-850-point scale. Most lenders give their best rates to consumers with scores in excess of 750, and will afford responsible consumers the ability to obtain a loan, rent an apartment, or lower their insurance rates.
If Millennials don’t have a credit card, they must rely solely on cash or a debit card. Since debit cards are linked to the consumers’ checking account, this activity is not reported to the credit bureaus and does not help to build a credit profile. On the other hand, activity on credit cards financed by card issuers is reported to the credit bureaus and help to establish a credit history. Also, debit cards do not protect from fraud as well as credit cards: victims of debit card fraud may have difficulty in meeting their financial obligations if it takes more than a week to resolve the disputed activity.
To avoid that type of circumstance, and ensure that he becomes a responsible user of credit, I shared a few rules of thumb with my son:
- Never pay your credit card late (even if he can only make a minimum payment);
- Never spend more than you can afford to pay off at the end of the month (this will also help him avoid interest charges that accrue on any unpaid amounts);
- Never exceed the amount used by more than a third of his available credit to keep his utilization ratio low (favorably viewed by credit issuers);
- Review your credit report frequently to remove any erroneous information (he can request his report three times a year from each of the credit bureaus).
Additionally, the Millennial he spoke to on the phone at his bank reinforced these rules to him (a big ‘thank-you’ to the peer influencer!).
On a related note, I am happy to report that my son has saved more than enough for the down payment on the car he plans to purchase in December. I think we are in a good place.
Stay tuned to see how he manages the debt load of a new car, increased auto insurance, his credit card, and his student loans.
A Boomer Parent, soon to be an Empty-nester