Growing up in middle class America, most people are aware of credit cards,
auto loans, student loans, and other ways to obtain credit. What many
Millennials learned is that the choices that they made in college have
much longer-reaching effects than they anticipated.
Millennials have, on average, have the lowest credit scores of all Americans.
With an average credit score of 625, Americans aged 19 to 34 have worse
credit scores than Americans aged 35 to 49, who have an average score
of 650. The Baby Boomers and those belonging to the Greatest Generation
(those between the ages of 50 and 87) have an average credit score of 709.
Two major factors, among others, have played a role in this disparity between
young and old in terms of credit worthiness. First, student loans account
for 24% of all new accounts opened by Millennials as opposed to 20% for
Generation X. Second, Millennials tend to have a general fear of opening
new credit card accounts. The Credit Card Accountability Responsibility
and Disclosure Act of 2009 (Credit CARD Act of 2009) placed stricter guidelines
on the marketing and issuing of credit cards to Americans ages 21 and
younger. To obtain a credit card pursuant to the Credit CARD Act, young
adults must prove an ability to repay certain debts, including car loans,
or be forced to ask for a cosigner.
Most young adults were not aware that the 2012 Case-Shiller home price
index reported the largest price drop in home values since Standard &
Poor began reporting those statistics. The youngest of the Millennials
were around 10 years old when the housing market reached its peak in 2006.
By the time they were able to drive, their parents had seen the worst
of the decline. What many young adults were aware of, however, was the
negative impact on their parents’ financial situations. They began
fearing money problems that really didn’t yet exist for them. Over
the years, that subtle fear has morphed into a stigma towards credit cards;
Millennials tend to avoid lenders offering high interest rates.
Millennials’ fear of consumer credit may be unfounded—credit
cards, when used responsibly, help individuals build a credit history,
improving their credit scores. Although Millennials are currently not
investing heavily in real estate, their ability to build a credit history
will be an important driver of our economy in the future.