As someone who consumes real estate-centric news daily, the number of articles about selling homes to millennials has increased dramatically. This generation is in the work force, generating revenue and moving forward in life. One of those steps includes purchasing their first home. Interestingly enough, the mistakes millennials make with their credit matches every other generation out there. The good news is the solution to their problems has already been already laid out.
Millennials and Credit
According to TransUnion, 43% of Millennials have sub-prime credit. This is credit that scores between 300 and 600. Most lenders are NOT going to loan someone whose credit score is at this level. If you do find a loan, the interest rate is going to be through the roof.
Just like every other generation out there, millennials simply aren’t educated on what credit is and how it works. I’m part of Generation X and I never was, that’s for sure. At this point, I could go on a rant about how there’s a desperate need for a personal finance/education class at the HIGH SCHOOL level. But I digress.
The game of credit is not tricky but the rules are not clearly laid out. What is in this article is based one experiences and tricks people have learned throughout the years.
Here are some things you need to understand about credit, no matter what generation you are in.
(1) Only the People Keeping Score Know the Rules
Think of it as playing a game. You make decisions but have no idea of the purchasing decisions are good for you or bad for you. For example, do I pay cash for these $300 in clothes? Or do I get the charge card and save 10%? Another example: do I go out with my friends tonight and pay the credit card bill late? It will only be late by a few days. Or do I stay home and pay it on time? You aren’t told when bad things happen to your credit or when good things happen. You have to go and ask the 3 judges and you’re only allowed to do this (for free) once a year.
(2) If you don’t have credit, don’t get it.
It’s a myth that you MUST have a credit score to get a home loan. The process is called “manual under-writing“. Not every loan servicer does manual under-writing because it involves work. If you’re speaking with a lender and they tell you that you need to “build your credit”, it’s time to go find another lender. I’m meeting more and more millennials who simply don’t have credit at all but are getting bad advice and assuming debt unnecessarily.
(4) The Game is Rigged Against You
A lot of people get paid a lot of money to separate you from your paycheck. During the late 80’s and 90’s, they realized that “easy monthly payments” can not only get you anything you want but also makes them a LOT more money with interest. When I was a kid, the only way advertisers could get to me was during the Saturday morning cartoon run. Today with mobile devices, these people are EVERYWHERE.
So what can you do to combat this credit situation?
(A) Don’t get any more credit
Don’t buy that new car unless you can pay cash for it. Don’t get another credit card because they are offering 10% off your first purchase. You will spend WAY more than 10% in all the interest you will pay over the next few years.
(B) Pay Down/Off Your Credit
Ultimately your goal should be to be debt free. As someone who”s been there, being debt free feels great. Divide your total credit card into four lines. Let’s say you have a $1,000 credit card. Split it up at $1000, $750, $500 and $250. Every time you make a payment and drop below one of those lines, your credit score goes up. On the other hand, if you buy something and push beyond one of these lines then your credit score goes down.
(C) Consult with a Lender
Just because you speak with a lender doesn’t mean you have to get a loan. Lenders have software programs that can analyze your credit situation and put you on the quickest path to improving your situation. It will involve hard work on your part but it will work.
When you are I are speaking, you tell me that you want to buy a home but your credit is all jacked up. The look of pain on my face is not because you aren’t a quick sale. It’s because I know you’re probably throwing away a LOT of money every month in rent and it will require 18 months of hard work on your part to get yourself into a position to buy a home. The best thing you can do is reach out to professionals and have them give you a plan to improve your situation.
As stated before, no matter how low your credit score is, it can always be improved. It takes hard work and dedication. Two words people do not like to hear but it’s the truth.