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Millennials have recently edged out the Baby Boomers by becoming the largest living generation in the United States. In the coming years, this trait can be very significant in determining upcoming elections and how retailers market new products. What is still to be determined is how they will affect the financial credit markets as many Millennials have very little credit history currently.
The Millennial age group is a broad generation with the oldest members being in their early 30s, so many millennials having been in the workforce for the past decade now. On the opposite end of the spectrum, there are new college graduates that are just beginning their careers.
This means that they are repaying their student loans, and they probably have a different financial outlook, molded by the Great Recession, then their older peers. The exact impact of the Great Recession on the older and younger members of the Millennial generation is still to be determined, but it is safe to say that it has made the entire generation more financially conservative when applying for a new credit card.
Fewer Millennials Have Credit Cards
The lasting effects of the Great Recession are most visibly seen in the low proportion of Millennials that own a credit card, approximately only 38%, compared to 65% of all Gen Xers and Baby Boomers. Possible explanations might include younger Millennials witnessing the negative consequences of consumer debt that caused their parents experienced during the credit crunch, and they do not want to repeat the same mistakes as their parents.
Another reason is the 2009 Credit Card Act which greatly curtailed the aggressive marketing efforts of credit card companies on college campuses. This is something that older Millennials might have experienced during their college career, and it may be the reason that some of them prefer a debit card instead.
As most Millennials grew up hearing that credit cards lead to debt, they have decided the overall risk of incurring debt is not worth the potential reward. Since approximately 40% of all credit card accounts have a late balance from month to month, this isn’t necessarily a bad approach.
While approximately 71% of young Millennials agree that having a credit card is an important financial tool, less than half have considered opening one up. While student loan payments can be a starting point to create a credit history, creditors normally emphasize credit cards more because reflect monthly spending habits more effectively. On top of this, they continue to influence credit score while student loans no longer impact credit score after being paid off.
An overwhelming number of Millennials might also be afraid to apply for credit cards because they do not understand how they work. Millennials are very familiar with debit cards, but because the funds are transferred instantly, there isn’t a payment history to be reported to the credit bureaus.
While having a lower credit score and no debt is better than having a tarnished credit score and a mountain of consumer debt, most Millennials can agree that keeping a small balance on a credit card during their 20s can be very beneficial. One option for an unsure Millennial may be a secured credit card which is often step one for someone trying to build good credit.
Student Loans Could Be to Blame
Nearly 60% of all college graduates that received a diploma in 2016 had student loan debt, with the approximate national average debt per borrower at $28,000. For somebody just starting out, this can be a huge obstacle. Due to student loan difficulties, many graduates do not have the money to purchase a new car or house until the balance is reduced.
For many Millennials, their student loan payments are the first financial tools to appear on their credit report. Late student loan payments will negatively affect a credit score and on-time payments will boost the score. The payment history for student loans might be the first (and only) impression a credit card company has of an applicant’s credit history. With this in mind, it goes without saying that a 12% default rate
Although the balance will not affect the credit score, lenders might still be hesitant to lend a 21-year old graduate that is still in the grace period for his student loan and just received the first paycheck from his new job. If they get approved, it will most likely be for smaller loan amounts and higher interest rates than a person with an established credit history.
Most Millennials Haven’t Had a Chance
Millennials simply do not have a good understanding of how the financial world operates due to their own inexperience. A good credit history and score take years to develop, and Millennials simply haven’t been on the Earth long enough to have the same credit building opportunities.
Recent college graduates are more focused on establishing a career and paying off their student loans. They do not have the money or desire for another monthly loan payment to finance a car or house. Eventually, that day for a lifestyle upgrade will arrive and they will be ready for another monthly payment. During the application, they are most likely relying on their current salary, the payment history of their student loans, and (possibly) a recently obtained credit card.
If they have little credit history, the creditor will most likely charge a higher interest rate for their first loan. But, if they can prove to the lender or credit card company that they can be financially responsible, then future credit will be much cheaper.
Author: Jeff Gitlen