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Experian's latest report on U.S. consumer credit includes an analysis of credit trends by age and generation, providing added context to the variation in credit scores.
Credit Builders Alliance (CBA) teaches that the credit report is a consumer's financial resume. It is a collection of behavioral indicators (i.e. credit utilization rates, payment behavior, etc.) widely recognized by the mainstream financial system, which are used to track and predict behavior, and influence access to safe and affordable mainstream financial products.
Are Millennials Avoiding the Financial System?
The media stereotype has been that "Millennials do not trust the financial system and are risk-averse." Often missing from that narrative sometimes is that Millennials are saddled with record student loan debt and came into the job market right after the mortgage crisis.
This year's State of Credit showed that Millennials are engaging with credit as they mature, witnessed by the 9% increase in their overall average debt and 11% increase in their average credit card debt versus 2016
How can these two very different perspectives be reconciled? With Millennials' cultural focus on access instead of ownership (ride sharing, music streaming, home rentals, etc.), the result is that many of these choices do not show up on a credit report—ultimately rendering the young adult "credit invisible."
Additionally, many young adults today are either unbanked or underbanked—meaning they rely on the use of cash and digital payment systems like Venmo more than checks or credit cards, while some have shunned credit card use altogether.
This raises questions about the ability of mainstream financial institutions to connect with young adults. Further, it brings into question how this generation will build wealth and maintain financial security.
35% of young adults do not have any credit cards.
According to the Young Invincibles report "Financial Health of Young America," 35% of young adults do not have any credit cards, compared to 21% of the general public. Additionally, young adults use high-cost alternative financial services products, with Americans ages 18-to-24 making up nearly a third of payday loan consumers.
With a median income of only around $34,000, the 71% of young adults with student debt often struggle to make these payments. Compounding this challenge are high levels of youth unemployment at 9.2%, as of January 2018 according to the Bureau of Labor Statistics.
Also, under-employment, which is when college-educated workers hold a job that does not require a degree, has been at 33% over the past two decades, according to the Federal Reserve Bank of New York.
Credit Action Steps for Millennials (And Everyone)
So, is there any hope for these young adults who are credit challenged?
The answer is a resounding YES.
CBA has developed Best Practices for a Good Credit Score and they are:
- Keep it Active! Establish and maintain a mix of at least three active installment and revolving credit trade lines—ALWAYS PAY ON TIME!
- Keep it Low! Lower debt balances on revolving lines of credit. A credit utilization ratio of 30% or below is a good rule of thumb. This is calculated by totaling the outstanding balances on all credit cards and dividing the total by the sum of each card's limit.
- Keep it Up! You want at least six months of credit history and activity on your credit report.
In order to put these practices into play, young adults need to start thinking about integrating credit building strategies into their lifestyle. They can start by taking an initial inventory to find out which of their products are currently being reported to a credit bureau.
For example, if debit cards are being used instead of credit cards, young adults need to realize that debit card payments are NOT reported to the major credit bureaus.
Applying for a secured credit card is an easy way to start building credit. As long as the young adult can save the money needed for the initial security deposit (around $400), they should qualify for the card.
In the past, a car loan was a typical entry point into the credit system. However, today's young adults may not need a car because they live in an urban setting and bike to work or use public transportation or ride-sharing services like Lyft and Uber. So, they need to consider other forms of credit that can help them build a positive credit history.
What about a store card from Urban Outfitters? Whatever loan they receive, young adults need to make sure that it is being reported to the credit bureaus. If you don't know—ask.
Making a concerted effort to enter the credit economy and consistently making on-time payments is a surefire way young adults can improve their credit scores. Then, just maybe, next year's Experian State of Credit report will show young adults bridging the generational divide and using credit even more responsibly!
Editor's Note: Guest writer Dara Duguay is the executive director of Credit Builders Alliance (CBA). Prior to joining CBA, she was the director of Citigroup's Office of Financial Education and founding executive director of the Jump$tart Coalition for Personal Financial Literacy. You can follow CBA @Credit_is_Asset.