The financial habits that build good credit remain the same no matter how old you are, but millennials have faced many challenges that can hold them back from better credit scores and financial mobility.
If you’re a millennial who needs to positively impact your credit, you should know that you have the power to do so on your own. Here is our DIY credit management guide for millennials.
The Importance of DIY Credit Management for Millennials
Good credit scores give you more financial agency, and borrowing power, and can save you a lot of money in the long run. They can even help you rent the home you want or get a job with certain employers. The factors that affect your credit score include:
- Payment History: Your history of making payments.
- Credit Utilization Ratio: The amount of available credit that you are currently using.
- Length of Credit History: The age of your accounts.
- Credit Mix: The types of credit accounts that you hold.
- New Credit: The number of new accounts you have.
There are many reasons that millennials may be wary of taking on debt. But the truth is that responsibly managing debt is the best way to build better credit.
Identifying Millennial Credit Challenges
Millennials face many challenges that can prevent them from building better credit:
- The median student loan debt for millennial borrowers is around $25,000 – $30,000 per borrower, and payments represent a large portion of the borrower’s monthly salary.
- 73% of millennials are currently living paycheck to paycheck.
- Many millennials entered the workforce before, during, and after the 2008 economic crisis.
- The COVID-19 pandemic hit millennials hard with a second economic downturn.
- High interest rates on mortgages are making homeownership less attainable.
- Millennials are the most likely age group to hold more credit card debt than they do emergency savings.
These challenges have the potential to limit millennials’ economic opportunities, reduce their income, and directly drag down consumer credit scores.
DIY Credit Management Strategies for Millennials
Millennials can use these DIY strategies to start improving their credit:
1. Check Credit Reports and Dispute Potential Inaccuracies
Inaccurate information in your credit report can negatively affect your credit score. You should review your credit report for possible inaccuracies in the following sections:
- Personal Information: Your name, past addresses, and other identifying information.
- Accounts: The credit accounts you have owned in the last seven years.
- Public Records: Bankruptcies appear on your credit report for up to 10 years.
- Credit Inquiries: Inquiries show up when someone pulls your credit report.
If you find potential inaccuracies, they can be disputed online, over the phone, or by submitting a dispute letter by mail to the credit bureau. You will need to provide the following information in your dispute:
- Your name and how to reach you.
- Your credit report’s confirmation number.
- The name of the company that furnished the information you are disputing.
- The account number or other information that identifies the item you are disputing.
- A brief explanation of why you believe the information is inaccurate.
- A brief explanation of any supporting documents you are providing.
Once you submit your dispute, you will have to wait 30 to 45 days while the credit bureau investigates and reaches out to the company that provided the information. If the credit bureau finds the information is inaccurate, they will remove it from your credit report.
To streamline the dispute process, CreditBuilderIQ offers an automated dispute letter generator to help you get it done without hassle.
2. Using Credit Cards Responsibly
One of the simplest ways to build your credit is to get a credit card and use it responsibly:
- Pay your credit card bill on time every month.
- Maintain a low credit card balance (many experts recommend keeping your utilization under 30% of your available credit limit).
- Keep your credit cards open to keep your credit utilization low and increase the age of your accounts.
3. Managing Student Loan Debt Effectively
Student loans are a major financial obstacle for many millennials. But you can use them to help build your credit:
- Make your loan payments on time every month.
- Choose a repayment plan that fits your financial circumstances, such as an income-driven repayment plan, to ensure you can afford to pay on time.
- Pay your loan off in full to provide long-term benefits to your credit.
Budgeting and Financial Management Tips for Millennials
Budgeting is important because it helps you live within your means and devote money to activities that build your credit.
1. Creating a Budget
Budgets are straightforward financial tools that just require a little setting up. Here’s how to create a budget:
- Add up the monthly income you receive. If your income varies from month to month, calculate an average estimate based on the previous months’ earnings.
- List every monthly expense you have, including rent, bills, food, gas, and more. For monthly bills that aren’t a fixed amount, calculate the average monthly amount you spend.
- Subtract your expenses from your income to see how much discretionary income you have left over.
Now that you have a budget, you can use it to allocate extra money toward financial behaviors that benefit your credit — such as paying extra toward a credit card or loan or putting money in savings. Remember to adjust your monthly budget when your income or expenses change.
There are many budgeting apps that you can use to easily create a budget and stick to it. Many apps even sync with your bank accounts, credit cards, loans, and other accounts to automatically track your income, expenses, and spending habits.
2. Paying Off Debt
Paying off debt helps you reduce your financial obligations and free up money for other financial goals. Paying down your balance on revolving credit accounts, like credit cards, improves your credit utilization and benefits your credit score. Paying off debt faster saves you money in the long run by reducing the interest you owe.
Two of the most popular debt repayment strategies are the debt snowball method and the debt avalanche method:
- With the debt snowball method, you pay off your smallest debts first for quick wins and a psychological boost.
- With the debt avalanche method, you pay off your debts with the highest interest rates first to save the most money.
Make debt repayment a focus in your budget and plan to put extra funds toward your debt to build credit and reduce your financial obligations over time.
3. Saving an Emergency Fund
Emergency savings funds can help you pay for unexpected expenses, so you don’t have to take out loans or charge big purchases to your credit card. When an unexpected car repair, medical bill, or other emergency expense comes up, your emergency savings can protect your finances and credit.
Experts often recommend saving at least three to six months’ worth of expenses in an emergency savings fund. If this seems unreachable, remember that having something is better than having nothing. Add a line item to your budget for emergency savings and consider setting up automatic transfers from your checking account to your savings account when your paycheck hits.
Protecting Your Credit in the Digital Age
Fraud and identity theft are a constant threat in the digital age. Criminals who gain access to your personally identifiable information (PII) can use it to steal your identity and negatively affect your credit. Here are some tips for protecting your credit in the digital age:
- Use strong, unique passwords for every online account. Consider signing up for a password manager app that automates the process.
- Set up multifactor authentication (MFA) for your online accounts to add an extra layer of security at the point of login.
- Look out for scams and phishing attempts. Don’t provide personal information online or over the phone.
- Don’t download unsolicited attachments or click links, even if they appear to be coming from a legitimate source.
- Verify any communications you receive through official channels. For example, if your credit card company sends you a link to reset your password, call the credit card provider directly using the contact information on their website to verify the request.
- Only connect to password-protected secure networks.
- Use a virtual private network (VPN) to encrypt your data and keep your location and identity anonymous online.
- Update your software for operating systems and apps so you have the most up-to-date security.
- Monitor your credit reports, bank accounts, credit cards, and other financial accounts to look out for suspicious activity.
Credit monitoring and identity protection companies can automate many of these steps by overseeing your credit and other crucial aspects of your identity. You’ll also gain access to software and technology that bolsters your online security.
Bottom Line
As a millennial navigating the modern digital age, building your credit can seem overwhelming. But if you ensure your credit reports are accurate, use your credit cards responsibly, manage your debt effectively, stick to a budget, and protect yourself online, you’ll find yourself on the path to better credit.
CreditBuilderIQ can help you navigate the DIY credit management process. We provide access to your credit reports and credit scores so you can track the progress of your DIY credit management efforts. You’ll also gain valuable tools, like interactive credit education courses and an automated dispute letter generator to help you improve your credit score.
