A Millennial’s Guide to Credit Scores

Millennials are no newbies to credit scores. With an average score of 687, those born between 1981 and 1996 are often balancing installment loans in the form of student loans and mortgages and revolving credit like credit cards.

Millennials have had more time to build up their credit history, which plays in their favor as they approach financial and personal milestones like getting married and buying a house. However, as always, a credit score is a work in progress that requires attention for the long haul.

What your credit score means to you

If you’re a millennial, you’ve probably been building your credit history for years. You may have a few cards and several loan payments under your belt, especially if you’ve been paying off student loans.

Having a longer credit history can be advantageous, as it will boost your score and make you more reliable in the eyes of the lender. Of course, it’s important that you’ve built up a positive history of making your payments on time and avoiding default or bankruptcy.

Your score will play a big part in the major loans you take out like a mortgage, personal or auto loans. Having a good score will mean you can get better terms, more loan options, more purchase options and a lower monthly payment and interest rate, which is why it’s crucial to focus on boosting your credit now and in the future.

What your credit score impacts

Your credit score can affect multiple aspects of your financial and personal life, from where you live to the kind of jobs you can get. Here are some of the big areas your credit score can impact.

Car loan terms

Taking out an auto loan will require a credit check. The better your score, the better terms you’ll be offered.

While you’ll typically need a minimum credit score to qualify for a car loan, lenders want to attract borrowers with a clean credit history and a high credit score, which is why they’ll offer lower interest rates for better credit scores.

The difference in your credit score can mean hundreds of dollars more — or less — on your monthly car payment.

Here’s an example: for a credit score in the 501 to 600 range, you’ll be offered, on average, an APR of 12.28 percent for a new car loan. Scores of 781 and up, on the other hand, can get an interest rate of 5.64 percent.

For a five-year auto loan of $30,000, that’s the difference between a $575 monthly payment and a $672 monthly payment — or nearly $100 a month.

Mortgage terms

A mortgage is one of the largest loans you can take out, and it will be heavily impacted by your credit score. Not only will you have to meet the score requirement to qualify, but the interest rate you’re offered on your mortgage will depend on your score.

Since mortgages tend to be heftier than car and personal loans, this can translate into a huge difference in how much you’ll pay each month and over the course of the mortgage. It also translates into how much house you’ll be able to afford.

Let’s say you have a $100,000 household income with a $50,000 down payment. You could afford a monthly payment of about $2,333.

On average, those with a credit score between 620 and 639 (the minimum credit score for a conventional mortgage) had an APR of 7.969 percent on their loan as of January 2024. To maintain your monthly payment with that interest rate, you could afford a house that costs $319,863.

On the other hand, those with a credit score of 760 or higher were offered an average APR of 6.38 percent. With the lower interest rate, you’ll be able to put more toward your principal and, with the same monthly payment, afford a house costing $366,300.

Refinancing and consolidating

If you have multiple debts you want to consolidate or are looking to refinance a current loan, you’ll want a good credit score to get the best deal possible.

Consolidation can help simplify your loan payments if you have multiple loans, and possibly get you an overall better interest rate than your previous loans. Qualifying for a consolidation loan will require a minimum credit score, and the higher your credit score, the better interest rate you’ll be offered.

Refinancing can be used to change the repayment terms of your loan, get a better interest rate or, in the case of mortgages, cash out on the equity of your home. Like with consolidation loans, you’ll need a minimum credit score to qualify, and you’ll get a better interest rate with a higher score.

Finally, you’ll need a good credit score if you want to take advantage of a balance transfer card. Balance transfer cards allow you to move a credit card balance to a card with a 0 percent APR introductory rate for a certain period of time — sometimes for up to 21 months. This can save you on interest while you pay the balance off, while enjoying the perks the card has to offer.

Job eligibility

Certain jobs may have your employer run a modified credit check on your history. Employers may want to see if you have any bankruptcies, defaults or missed payments in your credit history, which can indicate if you’ll be a reliable employee.

While your employer won’t see your credit score directly, they will see the history that your score is calculated with. Having a high credit score can indicate that you have a clean credit report and signal to employers you’ll be a good hire.

Insurance premiums

Car, home and other insurance premiums are calculated based on a variety of factors, one of which includes your credit score. Having a higher credit score can save you money on your premiums, as insurance companies often offer a discount for customers with a good credit history.

On average, those with poor credit will pay $4,801 annually on their car insurance, while individuals with excellent credit will pay less than half of that – $2,200. Having a better score can save you money every month on your premiums.

Card perks

As your credit history builds and your score improves, you’ll start getting better offers for credit cards with heftier perks and more bonuses.

Cards for good to excellent credit can offer higher cash-back rewards, more category rewards, sign-on bonuses and perks like store discounts and airport lounge access. (Secured cards typically don’t offer any bonuses, and cards for middling credit may have a flat cash-back rate for your purchases.)

What to watch in your credit score

Knowing what to focus on with your credit score will help you strategize your finances and improve your score more quickly. As your credit report evolves, here are the areas you can influence the most.

Payment history

Your payment history impacts your credit score the most heavily and is weighted 35 percent toward your FICO score calculations.

Missing a payment for any of your accounts — whether it’s mortgage, auto loan, a credit card or otherwise — can have drastic consequences on your credit score.

While missing a payment by a few days won’t immediately tank your score, if your payment goes 30 days or longer overdue, your lender will report this to the credit bureaus. Multiple missed payments may send your loan into default, which can result in repossession or your loan being sent to collections.

Missed payments can stay on your credit report for up to seven years, which is why you want to avoid them.

Your debt payments should be at the top of your priorities with your budget, and using tools like automatic payments and alerts can help you avoid forgetting about a payment. It’s also a good idea to review your credit report regularly and dispute any missed payment claims if they were made in error.

On the bright side, making your payments on time will contribute to your positive history, which stays on your report longer than your negative remarks as long as the account stays open.

Credit utilization

Your credit utilization ratio counts for 30 percent of your credit score, following closely behind your payment history in scoring weight for FICO.

Your revolving credit lines — your credit cards — will contribute the most directly to this, as you have a set maximum card limit for each month. As you make purchases on your card, your balance will increase, and your ratio will grow as you spend closer to the maximum.

For example, if you have a card with a $5,000 monthly limit, and you have a $2,500 balance on it, your utilization ratio for that card is 50 percent.

The total balances and limits on all your cards will contribute to your utilization ratio, which is why you want to be careful about your card balances across the board. Paying off your balance in full each month can keep your total balance down and ensure you’re not creeping too closely to your card maximum.

You also want to pay attention to the cards you don’t use or that you close. If you don’t use a credit card for a certain amount of time, your account may be closed. The line of credit it offers will be removed from your utilization ratio, driving it up and possibly lowering your score.

Finally, if you’ve increased your income, consider asking for a line of credit increase from your card provider. This can often be done digitally through your card app or an online application.

Hard inquiries

New credit lines and inquiries make up about 10 percent of your credit score calculations.

Applications for new credit can bring your score down by a few points because lenders and credit card providers will typically run a hard inquiry on your report when you apply for new credit.

A hard inquiry indicates to the credit bureaus that you’re applying for credit, which you don’t want to do too often. While a hard inquiry will only drop your score by a few points, several hard inquiries in a short period can build up quickly and lower your score by a more substantial degree.

Credit mix

The mix of credit you carry is weighted 10 percent towards your FICO score. While that’s not as large a part as your payment history or utilization ratio, it’s still something that can push your score forward or back by several points.

Credit mix refers to the diversity of credit types you have in your account. The two primary types you’ll most likely have are revolving credit (credit cards) and installment loans (loans with a fixed balance that you pay off each month).

By now, you may already have a mix of loan types. Student loans, auto loans, mortgages and personal loans will all count for installment loans, and having a couple of credit cards on your report in addition to this will diversify your mix.

If you have only one kind of credit on your report — for example, just a student loan or a car loan — you may want to add a credit card to help your credit mix.

How to boost your credit score

Increasing your credit score can be done in multiple ways, depending on your credit history and what areas you need to focus on.

In general, it’s a good idea to:

• Prioritize your payments. Missing a payment can do serious damage to your score, so be sure to make your loan and credit card payments each month. If you’re having trouble making your payments, talk to your lender to adjust your repayment plan or ask for a deferment.
• Be strategic with your utilization ratio. Keeping your credit card balance below your max can help keep your ratio low. Paying off your balance each month and asking your lender for a line of credit increase can go a long way.
• Aim for cards with the best perks. Opening up new lines of credit can be a way to increase your utilization ratio — with a strategic approach. Apply for cards with perks that you know you’ll use regularly so your card isn’t closed for inactivity, and make sure not to rack up too many hard inquiries.
• Leverage your installment loans. If you’re relying solely on credit cards, consider an installment loan for larger purchases instead of using your credit card balance if you can’t pay cash. You might get a better interest rate and improve your credit mix that way.
• Pay down your debt. The more debt you pay down, the less you’ll be charged in interest, and the more your credit utilization ratio will balance in your favor. Using debt repayment strategies like the snowball or avalanche method can maximize your payment impact and pay off your loans faster.

Focusing on building up positive activity on your report will be one of the key ways you can increase your score for the long-term, as positive activity will stay on your report as long as the accounts stay open.

Resources for boosting your score

There are several tools you can use to help improve your credit score and keep track of your payments. Which resources you use will be up to your needs and lifestyle, so be sure to consider your options.

Tools to view your credit score

Knowing your credit score is half the battle to boost it. Fortunately, there are several ways you can do this.

Each of the three credit bureaus — TransUnion, Equifax and Experian — allow you to request your credit report and score from them free of charge once a year. You can also sign up for a third-party service to pull your score for you, in exchange for you receiving affiliate offers based on your score.

Your bank or credit card may also offer a way to view your credit score, often through their app or online site.

Finally, if you’re working with a credit monitoring or repair service, you’ll be sent regular reports of your score and history.

Financial advisors

Speaking to a financial advisor can be helpful if you’re gearing up for a big purchase or want to conduct a “checkup” of your financial health.

A financial advisor, for a fee, will evaluate your finances and advise you on where you can improve and achieve your financial goals. They can help you get your budget in order, set savings goals for a big purchase and plan for paying down your debt.

Credit monitoring and repair

If you want more specific counseling around your credit score, you might consider a credit monitoring or repair service.

Credit monitoring services can help if you’ve been the victim of identity theft or if you want to watch your account for suspicious or unauthorized purchases. A credit monitoring service will regularly pull your credit report and report new inquiries and accounts to you. They’ll inform you of any sudden changes in your score.

Credit repair can be useful if you want to clean up your credit report, especially if you’ve gone through a bankruptcy or have had loans end up in collections. A credit repair company will dispute false claims on your credit report, removing negative items that may be dragging down your score.

While you can do this on your own, working with a credit repair company can be more efficient. Lexington Law, for example, has a team of experienced credit attorneys and paralegals who work directly with the credit bureaus to clean up your report and get inaccurate information removed quickly, potentially boosting your credit score with a quick turnaround time.

If you’re looking to get your credit report cleaned up for a big purchase, a new loan or simply for a fresh start, you may want to consider working with a repair company like Lexington Law.

The bottom line

As a millennial, your credit score plays a huge role in your finances, both on a large and small scale. Whether you’re gearing up to buy your first home, taking out an auto loan or getting the best deal on insurance, improving your credit score should be top of mind.

By leveraging your positive history, taking advantage of the credit options available to you and using tools like credit repair, you can get your score where you want it to be and take the next steps toward your financial milestones.