Here’s Where Millennials Have Great Credit Scores

Millennials in San Francisco, San Jose, Calif., and Denver are most likely to buck the trends of their peers and achieve top-tier credit profiles, according to the findings of a new LendingTree study.

In the continuation of a series of studies revealing the differences in personal finance conditions for people living in different places, LendingTree researchers looked into the places where millennials — defined as those born between 1981 and 1996 — were most likely to have excellent credit scores.

It’s not unexpected for younger folks, who may not have had as much time or financial experience to build strong credit histories, to have lower credit scores than older age groups, as we see in the breakdown of the study’s findings below.

• Millennials and Gen Xers have, on average, “fair” credit scores
• Baby boomers have “good” scores
• Members of the silent generation have “very good” scores

But when a low credit score is coupled with high levels of debt at a young age, it could be costly to a young person’s future in many ways. In a previous study, LendingTree found credit rating can have a huge impact on how much debt will cost a borrower over the long term.

Using the combined findings, researchers found it would cost millennials and Gen Xers $29,106 more than it would silent generation members for the same average-sized mortgage loan, and $4,783 for the same car loan.

It’s worth noting that in a previous study about where millennials carry the most debt, LendingTree found millennials in the 50 largest U.S. cities carry a whopping median of $23,064 in non-mortgage debt.

The silver lining in these findings is as long as they are in good health, younger generations generally have more time than older generations to do something about high debt and low credit scores. We explain how to get started on that later on.

Key findings

• Millennials in San Francisco, San Jose and Denver are most likely to achieve credit score sanctity, with 4.6%, 4.6%, and 3.5%, respectively, achieving “excellent” credit scores. Millennials in these metros also have notably higher credit scores than millennials we reviewed in the other studies, as well as in the nation as a whole. You can see the national breakdown above in “credit score by generation.”
• Millennials in San Jose carry the least amount of debt of any of the 50 largest metros in the U.S.
• At the other end of the dial, Memphis, Tenn., San Antonio and New Orleans were the places where millennials were least likely to have pristine credit — 1.3%, 1.4% and 1.5%, respectively, had scores over 800.
• Millennials in San Antonio carry the highest debt burden of any of the 50 largest metros in the U.S.

The 11 U.S. cities where millennials have great credit scores

The 9 U.S. cities where millennials don’t have great credit scores

2 major keys to building your credit score

Building your credit score comes down to understanding how your actions influence each of the five factors that credit scoring models generally consider.

The FICO scoring model — produced by the largest and most widely used credit scoring company, Fair Isaac Corp. — and others such as the VantageScore (created by the three major credit reporting bureaus: Experian, Equifax and TransUnion) use the information on your credit report to calculate a three-digit score that indicates to creditors how likely you will be to repay a loan on time if they were to extend you credit.

Your payment history and credit utilization ratio make up the bulk of your credit score.

Your on-time payment history is the most significant factor in your FICO score calculation — it accounts for 35% of your FICO credit score. Missing even one payment can damage your credit score since it’s a red flag to creditors that you may be unable to keep up with your debt obligations.

Your credit utilization ratio (or rate) accounts for about 30% of your FICO credit score. The utilization ratio measures how much of your available credit limit you are using. The lower your utilization ratio, the more positive of an impact it has in your credit scoring calculation. But maxing out your card could negatively impact your score.

The remaining three factors — the average length of your credit history (15%), new credit inquiries (10%) and the mix of accounts you have (10%) — account for 35% of your credit score.

That said, it follows the two most effective habits to focus on when trying to build your credit score: making on-time payments and keeping your revolving debt balances low.

The ideal combination of these efforts would be to pay off your credit cards in full each month. Keeping your balances low — ideally, below 30% of your available credit limit— may help make it easier to pay off your card balances each month.

Building your credit score when you have debt

As the LendingTree millennial debt and credit score studies seemingly indicate, many millennial consumers may be sitting at the unhappy intersection of high amounts of debt and low credit scores. It can be tough to focus on making in-full, on-time payments to build your score when your debt obligations are so overwhelming that you can barely manage your payments in the first place.

If you have amassed a large amount of revolving credit card debt and are having a difficult time keeping up with the monthly payments on your debts, you may consider the following methods to help better manage your payments and pay off your debt. These methods may help to increase your credit score over time.

Consolidate existing debt to help manage payments and avoid late payments

If you have a good credit score, using a debt consolidation tool such as a personal loan or balance transfer credit card can be the first step you take toward building up to “great” or “excellent.” A debt consolidation loan combines existing debts into a single debt with just one monthly payment. The strategy may help you get organized so that you can avoid late payments and the fees that go with them.

Also, when you use a new loan or line of credit to pay off existing debt, you refinance the debt on new terms. The new terms may lower your interest rate on the debt or extend your loan term, both of which could reduce your monthly payment amount, making it a bit easier to fit your debt payments into your monthly budget.

Personal loans

Using a personal loan entails taking out a new loan and using the lump-sum cash you receive to pay off existing debts. Examples of debt you can consolidate using a personal loan include credit card debt, medical loans, utility bills and bills in collection.

Personal loans are generally unsecured, fixed-rate loans repaid over a fixed repayment term. Generally, borrowers would need a good or excellent credit score to qualify for the best rates on a personal loan. You can qualify with worse credit, but you may need a cosigner. Interest rates on personal loans vary. As of this writing, unsecured personal loan rates range from about 6% to 36%.

The rate you receive is generally determined by factors such as your credit history, your debt-to-income ratio and whether you have sufficient income to cover the new debt payment. Some lenders may consider other factors such as your education and savings habits.

Lenders may allow qualified borrowers to take out up to $35,000 (or more with some lenders, or if you secure the loan with an asset) and repay the loan over terms ranging from 24 to 84 months.

Balance transfer credit card

Balance transfer credit cards offer 0% introductory APRs ranging from 12 to 21 months. When using a balance transfer card for debt consolidation, consumers generally open a new balance transfer credit card, move the debt from a card that charges a higher interest rate to the balance transfer card and aim to pay the balance off within the promotional 0% APR period.

Applicants generally need to have at least a “good” credit score on the FICO scale to qualify for a balance transfer credit card. Those with higher credit scores may qualify for the best balance transfer credit card offers.

Some lenders charge a balance transfer fee (equal to the greater of either 1.5% to 5% of the amount transferred or $5). That said, it’s important to first consider how the amount you would pay to transfer the debt compares to what you would save in interest payments before you go through with a balance transfer.

Pay down your credit cards to lower your utilization rate

Paying off a large amount of credit card debt may seem like a daunting challenge at first. If you’re feeling overwhelmed, you may want to consider applying a debt payoff strategy.

The debt avalanche strategy focuses on saving the most money in future interest payments by listing and paying down your debts from highest APR to lowest APR. The debt snowball strategy focuses on keeping up your momentum by listing and paying down your debts from lowest balance to highest balance, regardless of APR.

The debt snowball strategy likely won’t save you as much money in future interest payments as using the debt avalanche method, since your lowest balance may not have the highest interest rate. But it may help keep you motivated to see you’ve paid off one balance and can move on to the next one.

Which of the two methods you elect to use will depend on your personal preference, but either option may help reduce your stress levels by organizing and putting your total amount of debt in perspective. Also, sticking to a strategy may ultimately help speed up your debt payoff by giving you an easy-to-follow plan to follow.

Learn more about the debt avalanche method and the debt snowball method.

Use an app to help manage on-time bill payments

If you have a difficult time keeping up with when your various bills are due each month and how much you will owe on the accounts when that date comes around, you may want to consider trying out an app to help manage on-time bill payments.

Set up bill pay on your banking app

Just about every banking app has bill pay features incorporated into it. You can set up bill pay for things such as your utility and credit card bills through your banking app.

You can also do it the other way around and set up automatic payments using your credit card app to debit your bank account the minimum payment due (or something higher if you can swing it) on a particular day of the month.

Use an app that will remind you to pay your bills

If you just need a reminder to make the payment before it’s due, you may consider using an app such as Mint, which will track the bill and remind you to make a payment when it’s coming up and let you know if you’re low on funds. For this to work, be sure to allow notifications from the app in your settings, and ultimately follow through with making the payment.

Addressing the other three factors

We haven’t forgotten those of you who may be wondering how to tackle the three factors that make up a total of 35% of your credit score. As a quick reminder, they are the average length of your credit history (15%), new credit inquiries (10%) and the mix of accounts you have (10%).

Every little positive contribution toward your credit report counts, and working on these other areas may help to build your credit score. If you already have your utilization and on-time payment history under control, working on the final three factors may make a difference.

Here is a tip for each one.

Don’t close old credit cards

The length of your credit history is calculated as an overall age of your accounts, or the average age of your oldest and newest accounts. Generally speaking, the longer your credit history, the better it is for your credit score. Older accounts help to lengthen your credit history, so if you close an old account, your average age may fall — and so may your credit score.

Closing an account will also likely reduce the overall amount of credit available to you. If you’re carrying balances on your other cards, closing one account may increase your credit utilization, and negatively affect your credit score.

Avoid closing older accounts, even if you’ve finished paying off the credit card. That goes as long as the account is in good standing and it does not cost you a lot of money in fees to keep the account open.

Don’t apply for new credit too often

When you apply for new credit, the lender has to request your credit report or credit score, and that places a hard inquiry on your credit report. Having too many hard credit inquiries on your credit report may hamper your credit score, as it may signal you are having trouble paying your bills or are overspending.

But credit scoring models understand that if you are shopping around for credit, you may apply with several lenders before making a decision. That in mind, take care to plan your rate shopping. You generally won’t be penalized for multiple inquiries made in a 30- to 45-day time frame, as they will usually count as one inquiry.

Diversify your accounts

If you only have one or two of types of credit accounts, applying for a credit account you don’t already have could help pad your score.

A good mix of both revolving credit and installment loans on your credit report demonstrates to creditors that you have experience managing credit. Examples of revolving accounts include credit cards and personal lines of credit. Installment loans include mortgages, auto loans, student loans, and personal loans.

Having fewer types of accounts on your credit report demonstrates limited experience with credit, and translates into higher risk for lenders. For example, a less experienced borrower may have one credit card and a few student loans, whereas a more experienced borrower may have a few credit cards and personal loans, an auto loan and a mortgage.

Remember, it’s never advisable to take out credit you don’t need. But if you happen to need a new or used car already and decide to take a low-rate auto loan that you can pay off quickly, that might not be a bad idea if your goal is to diversify your credit mix.

Methodology

Using an anonymized sample of August 2018 credit report data from over 900,000 millennial LendingTree accountholders who were born between 1981 and 1996 in the 50 largest metropolitan statistical areas (“MSAs”), researchers calculated the average credit scores, and the percentage of people who had scores of 800 or more, and the percentage who had scores of 740 or more, aggregated to the MSA level.

LendingTree is a free credit monitoring service with over 9 million users.  It is available to everyone, regardless of their credit profiles or whether they’ve ever used the LendingTree platform to look for loans.