You’re a young adult, starting to build your career. You’re trying to juggle student loan payments, pay your rent and cover other bills, so it’s tempting to make an occasional late payment on your credit card. No big deal, right?
Think again. Late payments can damage your credit score, which can make it harder for you to get a loan — or even a new apartment — when you need one.
Young adults have been ratcheting back on most forms of debt, other than student loans. But an analysis by Experian, one of the three major credit-reporting agencies, suggests that the millennial generation — those now in their 20s — could do a better job at managing the debt they have.
Millennials have the fewest number of credit cards and the lowest average balance on them, according to Experian’s annual state of credit report. Yet, they also have the lowest credit scores, and a relatively high incidence of late payments.
The report is based on an analysis of more than 10 million credit files and uses Vantage scores, a competitor to the oft-cited FICO scores that form a large part of the credit report that lenders use to gauge an person’s credit risk. FICO is an acronym for the Fair Issac Corporation, which invented the scores.
The Vantage score is a three-digit number from 501 to 990 that lenders use to rank your credit worthiness; the higher your score, the better. (FICO scores run from 300 to 850).
Nationally, Experian found, the average debt in the United States is roughly $28,000, including credit cards, car loans, student loans and other personal loans. The average number of credit cards is more than two, and the average balance on the cards is about $4,500.
Millennials have low overall debt (about $23,000 per person on average, comparable to what the oldest Americans have), and the lowest average card debt ($2,700). Generation X, roughly those in their early 30s to age 46, has the highest average debt of the four generations analyzed, at $30,000. But while the average credit score in Experian’s analysis is 681, the average for millennials is just 628.
In part, that is because the younger generation has high utilization of their credit — they tend to have lower credit limits, so it does not take long to max out their cards. “It looks like they’re using a lot of credit, compared to what’s available to them,” said Rod Griffin, director of public education for Experian.
Younger adults also tend to have shorter credit histories, just because of their age, said Mr. Griffin; the length of time you’ve had an account factors into your credit score. It’s now more difficult now to obtain a credit card in your own name if you are under 21, because of the Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, of 2009. That law was aimed, in part, at keeping young people, particularly college students, from overspending with credit cards. A parent, however, can cosign, or add a child to their account as an authorized user.
A challenging economy and persistently higher unemployment for younger adults also makes it harder for them to stretch their income and could force them to use credit in an emergency. “They don’t have a lot of savings or financial flexibility,” said Joe Valenti, director of asset building at the Center for American Progress, an independent nonprofit research organization.
That rings true for Michelle Wood, a legal assistant in Marion, Ohio, who attends school at night. Ms. Wood, who turned 30 this year, said she had no emergency savings. She had a low credit score — in the 500’s — three years ago, but has been able to increase it into the high 600’s by using a secured credit card, which has a low limit, for smaller purchases, and then paying it off immediately. “I don’t have any other debt, other than my student loans,” she said. Still, she worries that she won’t be able to make her minimum loan payments when she completes her bachelor’s degree in social work. She decided she needed a four-year degree to get a better job, but she has accumulated about $40,000 in education debt.
Here are some questions about credit scores and debt:
Q. What factors go into my credit score?
A. Factors considered generally include the number and age of your accounts; your balances; payment history; and your use of revolving credit (credit cards) relative to your credit limit.
Q. What’s the best way to improve my credit score?
A. Pay your bills on time, even if you’re just making the minimum payment on a credit card, says credit expert John Ulzheimer; your payment history plays a big part in your credit score. Also avoid maxing out your cards, which can lower your score.
Q. How can I check my credit report?