With a generation slowed down by student loan debt, combined with a rising cost of living, Millennials are finding it difficult to obtain financing for some of life’s simple needs. One of the driving reasons Millennials are struggling to gain approval for personal loans and credit cards is their credit score. A credit score is one of the main data points lenders look at when deciding if the applicant meets their specific criteria. Furthermore, there are several data points that go into credit scores, many of which people can simply be unaware of.
A popular comparison to obtaining credit is similar to getting your first job out of college. Everyone wants you to have experience, but how can you have experience without getting a job?
Similar to job hunting, many lenders want you to have established credit, but to obtain established credit you first need to get credit. It’s a catch 22 and it can be difficult to overcome, but knowing what goes into your credit score can drastically help. First, your current level of debt has an impact on your credit score. Debt within itself means nothing because it needs to be compared against something, and that something is your income.
Known as the debt-to-income ratio, this essentially tells the lender how much debt you have in comparison to your income. The reason this is important is a lender wants to ensure you have enough money to make payments.
If you have a high debt-to-income ratio, it not only shows the lender you’re strapped for cash, but also your credit score will reflect that with a negative impact. Another impact on your credit score is the length of your current lines of credit and debt. The older your lines of credit the better because this means you can handle debt well and have a history of paying on time.
However, for those looking for credit for their first time, it can prove difficult because the oldest debt may be a student loan. While the impact on a credit score isn’t great, it is still something creditors look at when evaluating an application.
A final major impact to consider is the utilization of any current lines of credit. This means if you have a credit card with a line of credit at $1,000, how much of that are you currently using? If you are using your credit cards and maxing them out, your credit utilization will be high, having a negative impact on your score.
This simply tells potential lenders that you are more likely to use the whole line of credit or you currently might have a cash flow problem. Instead, look to keep credit card usage low and pay it off as quickly as possible. It may go without saying, but other negative marks on your credit include collections, late payments and bankruptcies.
While odds are a Millennial is newer to the debt markets, there is the potential to have this come up, and any one of these will be a red flag for current and potential lenders. Millennials are currently facing a unique financial situation in which the cost of education is disproportionate to the income received. Thus, they are struggling to earn enough to not only cover living costs, but save for large ticket items such as a home.
A direct consequence is the lenders are less likely to extend financing to Millennials. Should none of those work, you can look into a secured credit card. This is when you put down a deposit, and your line of credit is then secured by that deposit. Doing this eliminates risk for the financial institution, but allows you to build credit. In the game of credit, slow and steady wins the race.