Millennials think they know a lot about credit. But the numbers tell a different story.
More than 7 in 10 millennials said they feel confident about their credit knowledge, according to a recent survey by Experian. If fact, millennials on average estimated they had a score of 654. But it turns out that for many 18-to-34-year-olds, even that was an overestimation. And millennials are less likely to check their credit reports, Experian said.
"I would say they don't understand their credit. … Clearly they don't know how [credit scores] are calculated," said Guy Abramo, president of Experian consumer services.
Abramo said many people don't have a strong knowledge of how credit works and how scores are calculated. But most people don't overestimate the way millennials did. "Most people aren't overconfident," he said.
Here's how it works: Thirty-five percent of your credit score is determined by your payment history, or whether you have made payments on time, 30 percent is your credit utilization, or the amount borrowed compared to the total credit available, 15 percent is determined by the length of your credit history, 10 percent comes from the number of applications for new credit and 10 percent is from the types of credit you have (i.e. revolving, installment, mortgage etc.).
Generally, credit companies prefer a mix of credit because the variety suggests you know how to use credit responsibly. A combination of car and student loans along with some credit card use, for example, helps build up your credit score as long as you pay on time over an extended period.
Scores range from 300 to 850. If your score is above 750, you're considered to have excellent credit, which paves the way to the lowest interest rates and a better chance of getting approved for loans. If your score is on the lower side, it can cost you — that means higher interest rates on everything from credit cards to auto loans.
Here's the breakdown:
800+ = exceptional
740-799 = very good
670-739 = good
580-699 = fair
Below 580 = poor