Baby Boomers and Gen X’ers often poke fun at Millennials—the 26-year-old college graduate who lives at home with his parents. You may even have one at home yourself. However, if you look closer at the situation of many Millennials, you can begin to understand their situation: 71% of 2012 college graduates had student loan debt that averaged $25,550 for public colleges. More than 60% of Millennials moved back home after graduating, and as many as 74% of affluent and high-net-worth Millennials receive some form of financial assistance from their parents.
Knowing those statistics, it is easier to understand why nearly 63% of Millennials are eschewing credit for cash. Many are content to go through life using only their debit card. However, it is important to understand bank activity does not affect a credit report. Debit cards or prepaid debit cards are merely for convenience.
While avoiding credit card debt is certainly admirable, building a credit history is equally important. A credit history is a measure of how responsible one is with money. Credit scores are used by cell phone companies, landlords, mortgage lenders, utility companies and insurance agencies. Credit scores and credit histories determine what interest rates are offered and can even affect one’s ability to get a job.
So how can a Millennial build credit history if they’re avoiding consumer debt? Most importantly, it starts with paying your bills on time. Student loans are considered installment plans by Experian, TransUnion and Equifax, so making your payments on time can easily boost your credit score. Regular payments can demonstrate to future lenders that one can responsibly manage money.
If you already intend to help out your child, you may consider co-signing a loan for a car or co-sign a lease on an apartment. Again, on-time payments can help your child build credit. You can ask the landlord to report rent payments to a credit bureau, which can help prove the ability to handle an annual payment of $12,000 or more. However, you have to be willing to take on the debt yourself, in the event your child doesn’t make the payments.
The next step—albeit counterintuitively—is to take on consumer debt. Millennials can start building credit history by using a secured credit card. With a secured credit card, the credit limit is set by the amount of the security deposit made. The issuing bank is not at risk, so they are generally always approved. As payments are made each month, the activity is reported to the credit reporting agencies. Store credit can also work the same. One easy way is to buy something that you need anyway, for example, buying tires from Sears. You establish a credit account with the store and pay the balance each month.
Even if you cannot make a full payment, your credit can benefit from carrying a balance. While maintaining a balance on a credit card seems like not the best advice, on-time payments account for 35% of your overall credit score. But remember, credit is a measure of how you handle money. Any unpaid balance counts against your credit utilization rate, which is how much debt you carry versus how much credit has been extended to you; therefore, it is important to not let your spending get out of control.
While consumer debt can be a negative, establishing credit is an important step for Millennials to be independent adults. If you have questions on educating your children on financial matters, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.