Why Millennials Should Start Building Credit Sooner Rather than Later

Guest post by Lauren Davidson, a recent graduate from the University of Pennsylvania and personal finance writer.

When high school graduates go off to college, it’s a great time to start building credit and setting up for financial success later in life. Unfortunately, almost two-thirds of millennials don’t have a credit card, and aren’t doing anything to build their credit – even during their critical time in college. This leads to difficulties later once they graduate and are expected to enter the ‘adult’ world.

The issue is not necessarily that millennials aren’t applying for credit; a study by ID Analytics showed that millennials apply for credit cards more often than Generation X-ers or even Baby Boomers. The problem is two-fold: millennials have either bad credit, or none at all.

Mike Cetera, personal loan and credit analyst at Bankrate, says that millennials aren’t as concerned about things like good credit scores; “they know they will need [a good credit score] someday, but not right now, so it’s not a priority at this point.” Millennials often tend to worry more about taking on credit in general; some say it’s due to watching their parents struggle under huge credit card debts, mortgage payments, and other financial obligations.

That mindset, however, is putting millennials at a huge disadvantage when it comes to their financial stability and even employment later in life. If they graduate without establishing any credit, employers who pull their credit history may see them as inexperienced or immature. Landlords and lending institutions will refuse to offer a lease or extend credit, and they might even have a hard time refinancing their exorbitant student loans or buying a car.

Since many millennials are graduating college with staggering amounts of student debt, some analysts say their ever-growing mountain of obligation tends to make millennials shy away from taking on more. In an article for Time Money, Megan Leonhardt writes, “A lot of people who have thousands of dollars in student debt are asking themselves ‘why would I want to add credit card debt to that?’ While many millennials think making their student loan payments are enough, those payments don’t build credit – even though not making them can ruin a credit history.

In 2014, Pew Research Center reported that 32% of millennials still live with their parents; many of them cannot support themselves financially even after graduation from college. Some of that inability comes from bad credit; some students misuse credit or manage their money poorly while in college. By the time they graduate, they often have a poor credit score. Others – especially those who were completely financially dependent on their parents during school – never had a need for credit and so didn’t bother building a solid credit history. In both cases, graduates find themselves behind the curve later.

Credit cards aren’t the only way to build credit, but they’re one of the fastest and most efficient. Tom Barkley, assistant professor of finance at Syracuse University, says that students should get a credit card right away when they start college, and pay the bill off every month. Doing so builds a stronger credit history than maxing the card out and making minimum payments.

There are also several ways for millennials to build credit if they aren’t interested in a credit card. If they get an apartment during college, they should ensure that their name is on the lease and utility bills, instead of simply paying their roommate or allowing their utilities to be included in their rent. Barkley says that not only will this train students to pay bills on time and build behavior patterns that lead to financial responsibility, but it also allows them to start building a record of making payments on time.

Getting a small loan for a used car – even if it requires a parent co-signer or high interest rate – also can help a millennial build credit early on. Paying the loan on time or even paying it off early can provide a student with a jumpstart on building that crucial solid credit history before graduation, even if they don’t want a credit card.

The large amount of student loan debt that so many students are graduating with – and the trouble that many of them have finding solid employment after graduation – means that being able to refinance those loans after college is critical. However, LendEDU reported that 57% of grads are denied by private consolidation companies. Without a credit history and proven record of meeting financial obligations, many students will find that refinancing is not available to them, leaving them stuck with student loan payment they may not be able to make.

That situation, say experts, can lead to a downward financial spiral some students may never be able to get out of. It’s much easier in the long run, they say, to build that credit profile while still in school, and start practicing financial responsibility as early as possible.