How to Improve Your Credit Score (Long-Term) as a Millennial

We recently made a post about how to aggressively increase your credit score in the short term, but what’s the best way to increase it in the long run?

Know Your Credit Score

Before we dive in, I recommend looking into Credit Karma to see what your score is and what factors impact it the most. Credit Karma is a free resource to check your credit score.

If you’re not familiar with Credit Karma, they’ve raised hundreds of millions of dollars from venture capital firms and have a valuation in the BILLIONS.

A Few Assumptions

If you’re looking to increase your credit score in the long term, this post assumes a few things:

  1. You pay off your cards in full — no defaults
  2. No late payments — this affects your payment history
  3. 0–10% utilization — the lower your utilization is, the higher chances you have of increasing your credit score

It’s important to work on these three items first before worrying about increasing your credit score. It’ll help you become financially responsible and as a result, increase your credit score.

What Factors Impact Your Credit Score?

A lot of people might disagree with this post because it contains a lot of unconventional wisdom.

For a quick summary, this is how credit agencies grade you:

Factors that impact your credit score

Factors that impact your credit score

  • Credit card utilization = total credit card balances / your total credit card limits
  • On-time payment percentage = your on-time payments / your total payments
  • Derogatory marks = open accounts in collections + negative public records marks
  • Age of credit = average age of all open credit accounts
  • Total accounts = open accounts + closed accounts
  • Credit inquiries = hard pulls (credit cards, some banks, and Comcast)

Age of Credit History: How to Build a Strong Foundation

The best time to start building credit is when you’re in your early 20’s. The idea is that you’re building credit now for a strong credit profile in your 40–50’s or whenever you need to get a mortgage.

The strategy is to build the foundation of your credit score with credit cards that don’t have annual fees. Most people will try and close cards they don’t use, but this will impact your average age of accounts.

Credit Inquiries

Credit inquiries are a low impact item. The idea is you’re taking 1 step back to jump ten steps forward.

Credit inquiries affect your credit score for one year, and after one year it has no effect. They drop off your credit report in 2 years.

If you’re planning on getting a mortgage soon, don’t apply for new credit cards for at least 6–12 months. This will help you get a mortgage with a lower interest rate.

Total Accounts

Total accounts are also a low impact item, but it’s one you can control. Ironically, the more credit cards you have, the better.

You’re seen as more financially responsible if you have more credit cards compared to someone who only has 1–2 cards. This is assuming you pay off your credit cards and you don’t default. Obviously, don’t get more credit cards if it will be detrimental to your spending habits and credit score.

Common Misconceptions

A common misconception we often hear is, if someone has a lot of credit cards, then they must have a lot of debt, or they’re bad with money management. That’s not necessarily true, and often quite the opposite.

The more credit cards you have, the more you’re able to manage. As long as the following holds true:

  1. You pay off your credit cards on time
  2. You have low credit utilization
  3. Don’t default

Our Recommendation

If you’re in your 20’s and want to start building your foundation for credit, get 1–3 starter cards that have no annual fee.

Here are a few of our favorites: