Studies show that millennials aren’t fans of credit cards. In fact, according a recent study by Bankrate, 63% of millennials aged 18-29 don’t have a single credit card. Many experts believe that one of the reasons why millennials are wary of credit cards is that they already feel overburdened by the massive amounts of student loan debt that they’re carrying. But what millennials don’t realize is that having a credit card can potentially help them pay back their student loans faster.
That’s because having a credit card and using it responsibly can help millennials build their credit scores which would help them qualify to refinance their student loans at lower interest rates. By refinancing their loans, they can potentially save a significant amount of money on interest charges which could help them repay their student loans much faster, since more of their payments would be applied to the loan principal.
How Having a Credit Card Improves Credit Rating
When it comes to calculating your credit score, the most important credit ratings agency is FICO. While FICO keeps the exact details of how your score is calculated secret, they do divulge how they weigh various parts of your credit history to come up with your score.
There are five categories that FICO uses and which are weighted according to importance. Payment history makes up 35% of your score, the amount you owe makes up 30%, the length of your credit history makes up 15%, the type of credit you use makes up 10%, and whether or not you have new credit accounts makes up 10% of your score.
All student loan borrowers should get a credit card as soon as possible. They should buy things using their card and pay the card off every month. That’s because payment history is a big part of your credit score. You establish a good payment history by paying your credit card every month on time and improve your credit score considerably. Since your payment history on your student loans doesn’t start until six months after you graduate when you start having to pay back your loans, by having a credit card in college, you start establishing a payment history up to four years earlier.
If you rack up credit card debt that you can’t pay off then having a credit card won’t help you, but if you use your credit card responsibly then it can help your credit. Just be sure to only use 20%-30% of the credit limit on your credit card every month. FICO calculates the amount owed as a percentage of your available credit. That means that if you have a $500 credit limit and spend it all every month that you will be seen as using 100% of your credit frequently. That’s not a good sign, according to FICO. But if you use just $100- $150 of your credit limit every month then you’ll be seen as using just 20%-30% of your limit which will improve your score.
Length of Credit History
Getting a credit card sooner rather than later helps you create a longer credit history which will be key to improving your credit score in order to potentially qualify for student loan refinancing. A credit card is an easy credit account to get when you’re young since they are often offered to freshmen in the first weeks of college. By getting a credit card then, you’ll establish a long standing account. Just be sure not to cancel your oldest credit cards since doing so takes that account off your credit history and could reduce your credit score.
Type of Credit Used
If you only have student loans, your credit score won’t benefit by having a diversity of credit accounts. By having a credit card, your score will get a boost which will improve your chances of getting approved for refinancing your loans.
Whether or not you like credit cards, most people need to get one eventually. If you wait to get one until around the time when you will be applying for student loan refinancing, not only will you miss out on getting extra points for having a longstanding credit account, but you’ll also potentially lose points for having recently applied for a new credit account. Because people who are experiencing financial distress often apply for new credit, your credit score is reduced each time you fill out a new credit application or get a new account.
You Need a Credit Card
If you have student loans and you want to pay them off quickly then refinancing your loans and reducing your interest rate is often a critical step to doing so. But to qualify, you need a great credit score and a good job. The easiest way for Millennials to boost their score is to get a credit card as soon as possible and to use it responsibly with an eye towards building their credit.
Having a credit score won’t just help you refinance your student loans – it will also pay dividends throughout your life by helping you save money on your mortgage for example. There’s no such thing as a credit score that is too high!
Author: Jeff Gitlen
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