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Leverage for the Next Generations: How to Build Credit Effectively

Written by Jake Rickord.

laptop and card smile

According to a study done by Sallie Mae recently, the younger generations, from teens to young adults, are much more likely to make payments by debit card, cash, or mobile transfer (Venmo, Paypal), than by credit card. In fact, only around 50% of them have credit cards at all. This statistic is leaving some analysts, like those at Fortune magazine (Bloomberg) wondering if credit cards will soon go the way of the video store or Toys R Us. But what are some possible reasons for this shift away from debt lending instruments in young adults, and what lessons can they learn to ensure that picking one up doesn’t lead them to further financial struggles?

            One of the big reasons that can easily be identified as an answer to the first question is the looming student loan debt floating over most of those adults’ heads. The average student leaving college in 2017 had roughly $28,650 in student loan debt. On top of this, about 11% of outstanding student loans were 90 days or more delinquent or in default. With the risks of this debt compiling and carrying out, students and young people entering the workforce are less concerned about credit scores and more concerned on making sure they can pay their monthly loan amount, on top of any other recurring expenses. However, the one piece of good news coming out of paying these student loans is that by doing so, one can build up significant credit that will help take the place of missing out on credit card payments. While this avenue won’t leave much room to start borrowing to buy discretionary items, making these payments on time and for the right amount will allow young folk to build a strong credit foundation for the future.

            In addition to student loans, many other issues impede those looking to get a credit card early. In 2009, the Credit Card Accountability Responsibility and Disclosure Act set forth a precedent that banks needed to have more stringent policies with which they lend money, including not offering credit cards to anyone under the age of 21 without a co-signer or proof of income. Even if these are available, with little to no credit history available, some will be turned down for credit card offers. However, most companies offer some sort of secured debt instruments at the least which ask for a deposit upfront as a collateral credit limit. These will allow those with low or new credit scores to earn it while keeping the banks/credit card companies from being at risk. One additional method for those who choose not to use these types of cards is simply to be added as an authorized user on a parent’s credit card. While at a slower pace, this can help out a young person get started even if they don’t use it at all.

            Additionally, once their credit is established and starts going in the right direction, they must remain diligent to avoid having what they worked for diminished. There are many different factors that go into a person’s score, however following some key principles will be more than enough to continue pushing this score up:

  1. Use 30% max of the allowed total credit line. This 30% rule is used to ensure that one’s spending habits are in-line with how much they can borrow.
  2. Pay all bills on time. Either through setting up auto-pay or keeping a calendar with important payment deadlines written down, this is one of the most important factors.
  3. Continue using the debt instrument. Even if it’s only being used to pay for small monthly charges or gas bills, continuing to use the card will build up credit.
  4. Pay as much as is feasible. The balance set on the card is not nearly as important as the fact that it’s being used. In order to keep interest down (some go as high as 17%!), one should pay off as much of the balance as they can each month. This is especially important since roughly 25% of millennials have carried a credit card debt for over a year!

All in all, younger generations of people have sincere trepidation when it comes to using credit cards or any other item causing them to incur more debt than they’ve already been exposed to through student loans. They’re still fearful, having grown up through the Great Recession, and face several hurdles even if they decide to pursue getting a credit card. However, once they have them, and through loans, they can still build up a reasonable credit score and attain their financial dreams by remaining diligent and following advice like those points listed above. Please let us know if you have any questions on the above information for you, your family, or your friends.

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