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Small Changes, Big Impact
Sometimes a seemingly small difference can have a large effect, like the straw that broke the proverbial camel’s back. According to a recent study by the credit bureau Experian, that same principle applies to millennials and their borrowing behaviors. With a small change in financial habits, more millennials could significantly shift their risk perception with lenders – allowing them to qualify for mortgage loans or receive better rates if they do qualify.
Older Borrowers, Better Scores
Your credit score, a reflection of your borrowing and repayment history as reported to the credit bureaus, is a valuable risk assessment tool for lenders. It’s not the only measure, but you’ll need other positive factors – such as a large pool of savings or an increase in income – to overcome a poor credit score.
According to the study, average credit scores improve with age. Baby Boomers (age 51-71) average 727 under the VantageScore system with Generation Xers (age 36-50) well behind at 679 (close to the 677 average for all age groups).
Millennials show a further age gap within the generation. Older millennials (age 29-35) have an average credit score of 665, while younger millennials (ages 22-28) average 652. Overall, the majority of millennials fall outside the prime credit range of 661 and above – on the borderline for receiving an affordable mortgage loan offer.
Several Paths, Same Destination
Many younger millennials are just embarking on their careers while dealing with student loans and other new expenses. Combine this with a general aversion to credit – which gives lenders little if any credit history to assess – and it’s understandable why younger millennials would have lower credit scores than their slightly older counterparts.
Younger millennials also have higher delinquency rates on personal loans (2.08% compared to 1.51% for older millennials), compounding their risk in the eyes of lenders.
Older millennials without a mortgage aren’t faring much better. Experian found that for millennials without a mortgage, the average age was 28 with an average income of $33,000 and an average credit score of 623. Only 39% have a credit score in the prime range above 661.
Both sets of millennials have credit score gaps preventing affordable mortgages, but the challenges differ within the generation. Some have to overcome poorer credit histories, while others need to build credit histories from scratch.
Raise Your Score, Get a Mortgage
If you need a bit of a credit score boost to climb into the prime range and secure an affordable mortgage loan, what steps do you take?
Have you looked at your credit report lately? There may be reporting errors that are dragging your score down – or worse, evidence of identity thieves creating fake accounts or placing fraudulent charges on your existing accounts. You must correct these issues immediately, regardless of your credit score or home-shopping status.
Assuming your credit report is accurate, you can take simple steps that can make a big difference to your credit score. The most important step is to make all payments on time, every time. On-time payments are the largest component of your credit score, as they give lenders good reason to believe you’ll always repay your debts. Set up alerts, reminders, sticky notes, reverse tattoos on your forehead – whatever it takes to get payments in on time.
Of course, you’ll have to have the money to pay your bills – so you must keep spending and overall debt under control as well. If you can’t pay an entire bill, pay as much as you can afford to keep interest charges down and reduce your credit balance. Lowering your credit utilization, the amount of credit you use compared to your total credit limits, can raise your credit score significantly.
Keep old accounts open and open new accounts sparingly. Older, stable accounts show a history of responsible behavior, while opening multiple new accounts makes lenders think you’re about to spend more than you can afford to pay off.
Is your credit history too thin for lenders to assess your risk? Consider a starter credit card that you can use for small purchases each month (well below the credit limit) and pay off the bill each month. That’s a quick way to establish a good credit history because you hit the major risk factors (on-time payments and low credit utilization). If you want more credit, check out our list of credit card offers for a limited credit history.
Embark on a credit score improvement program before you shop for a mortgage, and you’ll be pleasantly surprised by your mortgage loan options.
Experian’s study shows that a small improvement in your credit score can go a long way to improving your ability to afford a home (and your financial situation in general). Using the above tips, a proper budget, and fiscal discipline, young millennials can achieve homeownership at a reasonable cost.
While the study focuses on millennials, the same logic applies regardless of your age or financial status. Small changes can make a big difference anywhere.
When it does come time to apply for a mortgage loan, make sure you realistically assess what you can afford. Some lenders will let you borrow more money than you should accept. Don’t ruin your fresh new credit with a long-term debt that you can’t afford to pay.