One of the big problems that millennials will face in the coming years is that they don't understand credit. A 2015 study by VantageScore found that millennials were the demographic who knew the least about credit scores with only 42% of them believing that their knowledge about credit was either good or excellent. That lack of knowledge has severe consequences. According to TransUnion, over 43% of borrowers between the ages of 18-36 have VantageScores of 600 or below – which makes them what is sometimes referred to as ‘sub-prime’ borrowers.

There are multiple reasons that millennials might have low credit scores. People in that age range often use too much of the credit that’s available to them. While you should ideally use just 20%-30% of your available credit, millennials are utilizing an average of 79%.

But many millennials are also avoiding credit cards, one of the most effective methods for building their credit scores. A Bankrate study found that almost two thirds of millennials don’t even have a credit card. Some millennials don’t have good enough credit to qualify for a card while others fear the consequences of taking on too much debt - especially given the fact that many currently have significant amounts of student loan debt. What they don’t realize is that not building their credit could make it more difficult and expensive for them to repay their student loans.

How Good Credit Helps You Repay Student Debt

Having a good job and a good credit score enables borrowers to consolidate student loans at a lower interest rate. Refinancing student debt can save borrowers thousands of dollars depending on how much they owe and how much they can save on interest. It could also allow borrowers to pay their loans faster since they could choose a different term length.

Refinancing disproportionately benefits those with the best credit scores as they are more likely to qualify for the lowest interest rates when they refinance their loans.

But student loan refinancing is not typically accessible to borrowers if they don’t have a good credit score or if they can’t get someone to cosign for them who has good credit. That means that those who don’t have a good credit score or who don’t understand credit won’t be able to save money by refinancing and will have to pay more money in interest over the life of their loans.

Loan Mistakes I’ve Seen My Students Make

Starting Early to Build Credit

Unfortunately, since many millennials don’t understand the impact and the benefits of having a good credit score, they aren’t accessing credit early and working to improve their scores. That leaves them at disadvantage because building credit takes time. Setting up a positive credit history and building your credit score can take years. Ideally, students should be getting a credit card and using it responsibly as soon as they qualify for a card in order to start building their credit. In fact, it is usually very easy for college students to get approved for a card since many card companies offer credit cards to students on campus.

But because most millennials don't understand the need for good credit, many are not actively working to build their credit. Without good credit, they are barred from several different financial aid options. For starters, if money is tight even after federal funding, their private student loan options will look much bleaker and more expensive. Additionally, if they want to refinance their student loans, they might not qualify or might not be able to secure a low rate.

Education Needed Early On

Young people today received little financial education in high school or college. Many millennials don't understand the student loans that they take out, let alone things as complicated as credit and credit scores. Some even develop a fear of going into greater debt after taking out large student loans which leads them to fear credit when they should be using it responsibly in order to build their score. High schools and colleges need to educate students better about student loans and the role that a good credit score can play in helping them to repay their loans.

These are lessons that will have huge impacts on their lives. Building a good credit score is something that will help them even after they repay their student loans. It will also help them qualify and get low rates for things like mortgages or auto loans, potentially saving them many thousands of dollars over their lifetimes.