In today’s world, lenders use many different types of credit scoring models. There are virtually hundreds of different models out there for lenders to choose from.
Many lenders continue to use conventional models that don’t provide a score for millions of consumers. That often puts younger borrowers such as millennials at a disadvantage.
Millennials are less likely to have long credit histories, and they may only have one or two credit accounts. Because young adults today carry more student loan debt, they are understandably reluctant to assume more debt. While that’s a prudent approach on the part of millennials, it can cause their score to be lower than those with deeper credit histories.
Many lenders are adopting new tools that address this problem. One example is VantageScore 4.0, which scores approximately 40 million more consumers than other conventional models.
Unfortunately, mortgage lenders are not able to use this model and rely on more conventional credit scoring models.
Regardless of the model, there are some common things you as a consumer can do to make it easier to get your next loan.
1. Assess your report. Get a copy of your report from the three major credit reporting companies (Equifax, Experian and TransUnion) at www.annualcreditreport.com and make sure the information is accurate. Evaluate your issues. Do you have a short credit history? You may need time to build it up. Is your file “thin” (fewer than four credit accounts)? Thicken it up (See No. 2). Are you using too much of your available credit? Pay down what you can on existing accounts to keep your credit utilization at 30 percent or less. Have you missed payments? Use calendar reminders or other tech solutions to help you stay on time. Getting in the habit of pulling your credit report one every 12 months is a good credit management habit.
2. Keep and use longstanding accounts. Don’t cancel an older account in an attempt to stop yourself from overspending, as the length of your credit history matters in traditional scoring methods. Use your accounts with care, and don’t charge more than you can afford. If you haven't used an account in a long time, make a small purchase or two to keep the account active.
3. Use technology to your advantage. Many companies allow you to set up automatic payments of minimum amounts to help you avoid late fees, or will send email or text reminders when a bill is coming due. As long as you have the income to support automatic payments (and/or ready reserve at your bank or credit union just in case), go ahead and sign up. Just make sure to keep a record of the dates and amounts of future payments to avoid unpleasant surprises.
4. Test your credit score know-how. Visit www.CreditScoreQuiz.org, created by VantageScore Solutions along with its partner, Consumer Federation of America, to see what you know and learn ways to improve your credit score.
No matter your situation, you can improve your own credit outlook by taking stock and following these tips to boost your score.