Why Do So Many Millennials Have Subprime Credit?

Credit scores are more than just numbers. They are a vital tool for obtaining access to credit — such as a credit card, mortgage or auto loan — and reaching financial milestones.

People who have good credit typically receive more favorable lending terms and interest rates that make it easier to borrow money.

But a recent study of credit-active consumers in TransUnion’s database revealed that 43 percent of millennials — ages 18 to 36 — have subprime credit, carrying a VantageScore of 600 or lower, compared to only 30 percent of all credit-active adults. That means almost half of millennials will likely struggle to buy a home or car, or even open a credit card.

To understand what is plaguing millennials’ credit, TransUnion analyzed millions of millennial consumers’ credit activity, finding that short histories, frequent borrowing and high credit card utilization might be to blame. Here’s a look at why many millennials have subprime credit.

1. Millennials have shorter credit histories.

Millennials average a short 100-month credit history, compared to a 271-month average for people ages 37 and older, found TransUnion’s analysis.

Credit history, or a record of previous debt repayment, can positively impact a person’s credit score because it shows lenders their ability to repay financial debts. With a limited credit history, however, lenders have no record of a person’s ability to make payments over an extended period of time, making them appear risky and unworthy of receiving access to credit.

2. Millennials frequently open new lines of credit.

TransUnion also found millennials open new credit lines every 20 months, on average. This is significantly faster than older consumers ages 37 and older, who average 46 months in between new credit lines.

Frequently or quickly opening new lines of credit indicates a need for fast access to cash — and can signify higher risk to lenders. It’s also important to remember that applying for a new credit card or loan is considered a hard inquiry, which can cause a slight, temporary ding to a person’s credit score.

3. Millennials have higher credit card utilization.

Millennials’ average credit card utilization is 42 percent, compared to just 29 percent for those ages 37 and older. That means members of the younger generation are using 42 percent of the credit available to them at any given time, which lowers their scores and suggests to lenders an unhealthy dependency on credit.

Find Out: How Credit Cards Help and Hurt Your Credit Score

5 Tips to Improve Your Credit Health

Now that you know the factors contributing to millennials’ poor credit health, what can you do to improve your score? If you’re a millennial — or if you know a millennial who can use credit help — here are five tips to keep in mind.

  1. Pay bills on time. It’s important to repay financial debts, including credit card and student loan payments, on time and in full each month. Fulfilling financial obligations demonstrates your ability to manage credit, and in turn, positively impacts your credit score.
  2. Build credit history. Building credit history is important, but how can you improve it if you have a low score and no access to credit? For one thing, ask your landlord to report on-time rent payments to the credit bureaus. You can also use a low-interest card to make small, manageable purchases like gas or groceries. Building a history of debt repayment, no matter how small, can help millennials’ credit record and score.
  3. Monitor credit utilization. Using a majority of available credit can be a red flag to lenders who might question your ability to pay back all of your loans. TransUnion recommends that all people — including millennials — keep their credit utilization low to demonstrate financial responsibility to lenders.
  4. Be conservative about opening retail credit cards. Even though these cards come with special perks and discounts that can be quite appealing, they often have low credit limits and high interest rates compared to other fixed-rate or variable-rate credit cards. Missing payments on a retail credit card could have an especially negative impact on your credit score.
  5. Access credit reports from bureaus. Credit scores are important, but they don’t tell the full story. Your credit score is the equivalent of one grade in a class, whereas your report represents the full report card. Regularly checking credit reports can help you understand your credit history and the factors impacting your credit health. And, they can help expose signs of identity theft. All consumers should take advantage of their free annual credit report from AnnualCreditReport.com to stay up to date on their credit health.

When managed responsibly, credit is a powerful financial tool that provides access to the credit needed to achieve financial milestones. To learn more about credit health, go to TransUnion.com.

Watch:  7 Secret Perks You Enjoy If You Have a Good Credit Score

Disclaimer: This content is provided by TransUnion. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author and do not reflect those of GOBankingRates or TransUnion.