Your credit history is the report card of your financial habits. You can think of your credit score like your GPA. If you’ve been a studious debt manager, you’ll receive an A — this roughly converts to 800 or higher.
Technically, credit scores range from the low 300s to the high 800s. Yet, as most B students are eager to remind us, you can get pretty far in life with a B average (740 or higher).
Read: How to Build Credit
Lenders use your credit score to determine how likely you are to repay your various debts. The score itself is determined by several factors in your credit history. Among the factors are positive repayment history, your debt usage ratio (how much debt you owe in relation to your credit limit) and credit mix (the various types of credit you use, such as credit cards, mortgage, car loans, etc.).
A 2016 TransUnion survey revealed that millennials are facing challenges in this area, however — their average credit history is less than half of that of all other age groups. Since the key to low-interest rates on major purchases (think home or car) is a healthy credit history, it means millennials are in trouble.
If this has been you, here are five millennial-friendly tips to build your credit history from scratch.
Apply for a Secured Loan
Also known as a credit-builder loan, this loan type is specifically designed to help build your credit by establishing a positive repayment history. You can obtain one through an online service provider or credit union. The best part about these loans? You claim the money you put up for collateral in the end. For instance, if you choose to borrow $500 for 12 months, you are entitled to the original $500 plus interest (minus administrative fees).
Open a Secured Credit Card
A secured credit card is “secured” with your down payment, which acts like your credit limit. This will keep you from overspending and allow you to practice responsible personal finance habits, like paying the monthly balance in full. The card issuer will report your payment history, and you’ll start building a positive credit history.
Open a Credit Card — and Throw It Away
It might sound counterintuitive to open a credit card that you’re going to throw away, but as explained above, 30-percent of your credit score is your debt usage ratio. A simple way to improve your ratio? Increase your available credit by opening a new credit card you don’t use or only use for emergencies.
In most instances, applying for a new credit card will cause a “hard” credit check — potentially, but temporarily, lowering your credit score. I recommend throwing the card away to remove any temptation for irresponsible spending. There is absolutely no reason to add unnecessary temptation to your life.
Remember, the only function this card should serve is to maintain a low or $0 balance each month. It’s not for daily purchases or to show off on Instagram. At best, sign up for the card’s online account, shred and throw away the physical card and then automate your payments.
Use a 0% Interest Loan to Purchase Something You Are Going to Buy Anyway
When I was in college, I was perfectly happy owning an array of the finest lawn chairs $20 could buy. But, like most adults, I now like having furniture that comfortably sits more than one average-sized sophomore student. When I recently moved, I could have saved up for months and paid cash but I also would have been furniture-less for three to six months. Instead, I opened two zero percent interest loans that I paid off in full within the no interest grace period. Because “credit mix” plays a role in your credit score, this will build and diversify your credit history.
Automate, Automate, Automate
When in doubt, automate it out. In situations like what was just discussed about using zero percent interest loans, automate your monthly payments to ensure you pay off the balance in full within the zero percent interest window to avoid balloon or back-interest payments.
In an effort to avoid incurring the wrath of some in the personal finance community, I must admit that you don’t need a credit history if you want to live off the grid in a van down by the river. I like the convenience and security of credit cards and small loans as long as I focus on living within my means and practicing responsible repayment habits through automation. There are several apps that can assist with automating your payments, but in most cases, you can set up autopay through your bank or credit union.
Click here to read about an easy trick to improve your credit score and avoid late payments.