At some point, millennials will ask themselves the same burning questions: Why do I have trouble finding a suitable credit offer? How can I get a loan to buy a car or pay the necessary expenses? It comes down to something often overlooked—creditworthiness. Creditworthiness involves building trust with both banks and lenders. Here are some simple steps millennials can take to improve their creditworthiness.
4 Ways to Build Your Creditworthiness
The primary way to build creditworthiness is by increasing your credit score. A credit score is a rating formed based on your ability to pay off credit that lenders, such as banks or other financial institutions, give you.
- Get a Credit Card
Even though you may consider credit cards to be risky, getting a credit card can be a useful tool when working toward a higher credit score.
Apart from credit cards, you have other options. You might also consider a secured credit card, which requires a certain deposit as an assurance of payment. If there is money tied to the card as a security, the card issuer can use those funds if you don’t pay off the credit you use. Secured credit cards usually have limits between $300 and $500.
Although credit cards are easy to get compared to credit lines, bad credit loans or other types of loans, you still need to provide information about your income and credit history. Chances are that your application will be approved if you don’t have any major incidents in your financial history.
- Keep Your Balance-to-Limit Ratio Low
Your balance-to-limit ratio, sometimes called a “credit utilization rate,” is one aspect prospective lenders look at when they decide how much credit to give you. A balance-to-limit ratio is the amount of credit used (your balance) compared to the total credit line. Credit scoring companies will heavily consider it when determining your credit score. That score is then used by lenders, and it can have a large impact on their decision whether to issue credit.
To ensure a balance-to-limit ratio that has a favorable effect on your credit score, make sure to keep it under 30%. For example, if you have a $2,000 limit on your credit card, you should use only $600 of available cash—or 30% of your total limit. Having a balance over 30% can harm your overall credit score, so you should pay attention to your balance on a regular basis.
- Avoid Committing to Joint Credit Products
Family and friends often help others, particularly younger generations, establish themselves financially by guaranteeing their debts, such as rental leases, credit cards, or car loans. This help might have a considerable impact on your own credit score, especially if the person you guaranteed doesn’t meet their responsibilities.
Problems arise when two or more people sign a joint lease, and someone defaults on the payments. Be careful when co-signing on these types of loans. When the other person defaults, it can show up as a default for you, too.
- Check Your Credit Reports for Mistakes and Unpaid Bills
A 2013 study conducted by the FTC showed that one in four consumers have a mistake on their credit reports. Errors on your credit report can significantly impact your credit scores.
You should review your credit report with the three bureaus in charge of keeping track of credit history. By checking regularly, you can ensure that you catch mistakes right away, and you can take steps to correct them. Otherwise, these errors can affect your ability to get a loan or lease.
Also, keeping track of your accounts is a good idea. You can do this by checking the information listed in your credit history for errors and unpaid expenses. You may have some bills that are showing up as unpaid, and you didn’t even realize it. In most cases, it’s in your best interest to address these debts and pay them in full.
Using Your Creditworthiness to Your Advantage
All things considered, there are several ways millennials can build credit. You can use these tips and information to help you increase your credit score over time.