June 26th, 2014
Credit Scores Are a Mystery for Many Millennials
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A recent study released by the Consumer Federation of America and VantageScore Solutions found that in comparison to older Americans, 18-34 year-olds are less knowledgeable about credit.
While it’s not surprising that older consumers tend to know more about credit scores than younger consumers, it is concerning. Credit knowledge is especially important for young adults because they can either form good or bad habits while they’re building their credit from scratch. For many millennials, student loans are their introduction to the credit world. Handling those loans can either help them establish good credit if they understand how credit works, or could devastate their credit health if they don’t understand the implication of late payments.
So what exactly are they confused about?
Fundamentally, it seems that millennials don’t understand what factors are used (and what factors aren’t used) to calculate scores. For example, they’re more likely to think that their age is a factor. In reality, while lenders care about your average age of open credit lines, your actual age isn’t included on your credit report and doesn’t affect your score. Moreover, only 6 percent correctly identified the factors that could potentially impact their score, such as their total number of accounts and number of hard inquiries.
In addition, many millennials don’t seem to grasp how much credit scores matter. This is a serious issue because it could mean that they’re unaware of the financial implications of bad credit.
Are they doing anything right?
Fortunately, most millennials understand that high credit card utilization, late payments and derogatory marks can negatively affect their score. Additionally, 50 percent of millennials realize that credit repair companies are rarely (if ever) helpful in fixing credit report errors and improving credit scores.
Also encouraging: today’s young adults carry lower credit balances and are less likely to pay their bills late compared to Generation X. Combine their good financial habits with some credit education and we’re confident that millennials should have the tools they need to improve their financial situations.
What can millennials do to educate themselves?
The study revealed that millennials who have gotten copies of their credit reports know more about credit than those who haven’t. Therefore, a good place to start educating yourself is Credit Karma. Here, you’ll get both your TransUnion credit report and credit scores for free. Knowing what is on your credit report will not only teach you what factors affect your credit score, but will also help you ensure that the correct information is being reported. Secondly, the study recommends that people take the Credit Score Quiz, which not only assesses people’s credit knowledge, but also provides helpful information and facts. Finally, track your credit score to stay on top of your credit health. Millennials might not know much about credit scores this year, but it doesn’t have to stay that way!
Nazhat Salim is a Member Support Specialist at Credit Karma. She spends her free time reading, devouring desserts and talking to her slightly deaf cat, Pusho. When she’s not doing those things, she is dreaming about doing them.
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