A Guide to Credit For Financially Clueless Millennials

When two of my 20-something staff writers told me neither had a credit card, I was shocked. I was glad they were avoiding consumer debt but was upset they weren’t building a credit history. But they’re not alone in their plastic abstinence While there’s been a recent increase in millennial credit card adoption, overall they’re far more averse to debt and comfortable with cash and debit cards.

But if you don’t use a credit card, you’re not creating a credit history. And without a credit history, you basically have bad credit. And that’s bad news.

Bad credit not only makes everything more expensive, it limits your choices in housing, transportation and even employment. Landlords check credit before offering leases. Banks check credit to set mortgages. Bad credit jacks up auto insurance rates. Most maddening, in light of your desperate need for money, bad credit can prevent you from getting a job to earn enough money to pay off your debts with prospective employers pulling credit reports to judge candidates.

But let’s take a break from discussing credit’s ability to ruin your life and talk about credit is.

A credit score is a tool lenders use to hedge their bets. Credit scores take some guesswork out of lending. Every loan entails risk, but lending to a borrower with a history of timely makes the risk appears lower. A credit score rates your debt payment record, assigning it a number between 300 and 850—like the S.A.T.s, there’s no zero—so lenders can assess your creditworthiness in a glance.

FICO And You

There are several credit rating systems but the most common and therefore important is FICO, AKA the Fair, Isaac and Company. FICO’s “predictive analytics” analyzes information collected from credit reporting agencies to predict likely outcomes for lending money. FICO is the most widely used credit rating, so generally, the terms FICO score and credit score are used interchangeably.

Breaking Down the Score

FICO takes five factors into account when they tabulate their scores.

Payment history: Paying your bills on time accounts for 35 percent of your credit score.
Credit Utilization: The amount of credit you use counts for 30 percent of your FICO score. If you owe $2,000 to four cards with $2,500 limits, the $8,000 you owe on the $10,000 total of your credit line represents 80 percent of your available credit, which, by the way, is too much. Nerdwallet recommends keeping it under 30 percent.
Age of Credit Accounts: The length of time you’ve had an account open forms 15 percent of your score.
Recent Credit Inquiries: Lenders count credit background checks for 10 percent of credit scores.
Types of Credit: Lenders like to see a mix of borrowing, and variety of credit makes up 10 percent of your credit score. Only have a credit card or a student loan can bring your score down.

Credit Reports

If your credit sucks, your first step to improving it is by getting copies of your credit reports. Three credit reporting companies, Transunion, Experian and Equifax have compiled detailed accounts of your debt repayment history. You need all three reports. Each could have different information. FICO assigns a score to each credit report and different lenders and companies partner with different credit reporting agencies.

Your credit report also includes such as mortgages, student loans and car loans. It doesn’t include other payments unless you fail to make them and the lender reports it to a debt collector. Overdue utility bills, unpaid medical expenses like emergency room visits and owed rent will drag down your credit these kinds of payment only impact your credit for the worse. If you make the payments on time, credit rating agencies won’t notice.

Thanks to a 2003 law authored by the then-congressman and current beloved angry grandpa Bernie Sanders, every American is legally entitled to receive a free copy of each credit reports every 12 months. Despite what annoying TV ad jingles say about free credit reports, there’s only one federal government approved site to get them: annualcreditreport.com. The other credit reporting services are not only annoying commercial creators: many are scams and rip-offs.

Cleaning Up Your Credit

Credit reports are notoriously riddled with errors. A 2012 FTC survey found that 20 percent of people who pulled their credit report found an error on the report. Five percent of respondents had errors severe enough to hurt their credit.

If your credit report has errors, don’t bother with credit repair services. Those services can’t do anything you can’t do yourself. Contesting a charge isn’t complicated but it requires effort and focus. Study your credit reports. If you notice something screwy, start writing letters. Following these guidelines and sample letters from the FTC, send letters and copies (not originals) of supportive documentation to each of the agencies reporting the error and the originator of the claim.

Sometimes lenders give up on collecting a loan and sell the debt to a collection agency. The collection agencies that buy loans aren’t shy about getting in touch. Expect phone calls, letters and pushy attitudes. Thankfully, you have options. If they contact you in error, send a certified letter saying you don’t owe them money. If they prove the debt is legit, Bankrate.com advises negotiating. They may accept a smaller amount than you owe or agree to delete the account from your credit report.

Improving your credit won’t happen overnight. Fixing bad credit means changing your habits and waiting for lenders to notice. Making timely payments and be patient. Things will improve, slowly but surely.