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How Millennials Can Avoid the Long Term Credit Debt Trap

Posted December 13, 2017 by Sporty Dave to Credit / Credit Cards 0 0
This post was written by a EasyFinance.com Community member. The views expressed below may not reflect the views of EasyFinance.com.

Credit Card Use

With so many millennials in Canada entering a debt-laden society, credit has become an essential component of building a financial future.

The ability to build credit that will enable you to get a mortgage or a small personal loan, or even rent an apartment or find employment has become central.

Bad credit scores will keep you out of the game indefinitely. A credit rating between 300 and 850 can make all the difference to your financial future.

Among those who currently struggling with the Canadian debt, climate are the millennial generation.

A combination of arrogance, unqualified overconfidence and a lack of actual capital is rapidly leaving millennials dejected and despondent.

According to a study by Experian, young adults between the ages of 19 to 34 had an average credit score of 625.

Generation X has around 33% of its population holding a subprime credit score. Baby boomers have around 20% in the same category.

Contrast that to the millennial generation that is faced with a 43% subprime credit score.

Part of the problem may be explained by the millennial tendency to use more of their limited but available credit.

The national average of those who use their available credit limit is that 34. Contrast this with the millennial generation who are using around 43% of their available credit limit.

They are also more inclined to have car loans and a more likely to struggle with student debt.

Part of the concern that many have is the general ignorance among the millennial generation of their financial situation.

A 2017 survey by the National Endowment for Financial Education and George Washington University revealed that only 8% of millennials had what could be considered a decent amount of financial understanding.

Know Your True Credit Position

There appears to be quite a gap between what this generation needs to know, what they think they know and what they know.

On the downside, they do not seem to be aware of the impact their credit score is going to have on their ability to purchase a house or perhaps even get a job in the future.

Many millennials seem unaware of the record a student debt they're carrying and the likely consequences. Around 75% of millennials have at least one source of long-term debt, whether it be a student loan, car loan or mortgage. The other 30% have multiple forms of long-term debt.

The good news is (though many do not seem to be aware of it), that it is possible to correct a bad credit score if corrective action is taken.

In fact, according to Auto Loans, Canada, a recent report from the Financial Consumer Agency of Canada observed that roughly 25% of car loans were given to applicants who had a current classification of either nonprime, subprime and even deep subprime based on their credit score.

For millennials wanting to correct their credit situation and move forward with a more secure and stable financial future, there are several steps that you can take.

Develop a Good Payment Habit and Solid Credit History

A good credit score is usually the result of on-time payment habits, a credit history and low credit utilization.

While millennials will naturally begin life with a short credit history, they also have the personal advantage of a lower level of debt, if they manage their finances wisely. In fact, it could be argued that the millennial debt is lower than that of many other generations.

For example, the typical millennial has an average debt of $47,089. Their total credit limit is $59,514.  By contrast, the previous generation owes $43,271 on a credit limit of $85,628.

Another strategy for millennials who want to better manage their credit reputation is to ask the landlord to submit rent records and records of payments to credit bureaus which effectively adds a positive credit history to those bureau reports.

The way forward for millennials who want to secure a reasonable financial future is going to require patience.

Millennials appear twice as likely to open up new lines of credit than other age groups and do not fare well when set alongside those with a much longer and more established credit history.

Credit card utilisation needs to be moderated and payments need to be made in a timely fashion.

Millennials are going to need to take the long view with regard to their financial freedom. It is not going to come quickly to them and will not be realized at all without discipline.


Pixabay Feature Image CC0 License

About Sporty Dave: David is an Australian blogger with an interest in finance and family and writes for Born 2 Invest and Self Growth.

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