Generation Y at Disadvantage for Establishing Credit

Tuesday, July 24 at 05:00 PM
Category: Personal Finance

The youngest credit demographic, those that are 19 to 29 years old, are facing new barriers to creating credit history.  A challenging job market, mounting student loan and mortgage debt are hurting this group’s credit scores and ability to build credit.  According to data released by credit bureau Experian, this demographic has the lowest average credit score, 672 on the VantageScore scale.  While longevity plays a role in a person’s credit score, this demographic has a score nearly 80 points lower than the national average of 751.¹

Part of this age group’s difficulty in establishing credit can be attributed to an overemphasis on debit cards and not enough revolving debt through credit card use. Maxine Sweet, vice president of public education at Experian, a credit services company, said it best, “debit cards don’t build credit.”

The good news for this generation is that they seem to have learned from observing earlier generations that irresponsible use of credit cards is to be avoided at all costs. However, if they become too scared of the responsible use of credit cards and use only debit cards, it will negatively impact their ability to get credit for things like cars and homes. It really is important to have a balanced and responsible approach to credit as a young adult.

Generation Y is also the first to be affected by the CARD (Credit Card Accountability Responsibility and Disclosure)Act of 2009, which has resulted in fewer credit cards being issued to those under the age of 21.  Having a credit vehicle is important in establishing credit. When used responsibly, credit cards allow users to establish a payment history and can help bring up credit scores.

Just five percent of people in this age demographic have revolving debts through credit card use, which keeps them from gaining any positive references associated with a monthly credit card payment. Sweet stated, “More and more people are getting out of college without having established a credit report.” She recommends that this demographic use credit cards on purchases to be paid off at the end of each month.

While Gen Y has the smallest amount of debt overall of any generation with average debt at $34,043, they show major shifts when it comes to where they accumulate debt. The Experian data, not surprisingly, found that Gen Y has the highest student loan debt at 421 percent higher than the national average. In addition, their auto loan debt is 136 percent higher than the national average and bankcard debt is 24 percent higher.

Credit reports and credit scores tend to be most influential to people in this age range because they usually have fewer financial resources and are more likely to need credit. That’s why it’s so important for them to learn how credit and credit scores work and the fact that bad credit or no credit can raise interest rates and hit them where it really hurts – in the wallet.

According to a new report from the Consumer Federation of America and VantageScore Solutions, American adults don’t know much about how credit scores are calculated and what impacts them the most.²  However, they provide several tips for improving a credit score, including:

  • Make bill payments on time each month and plan to pay off the balance every month
  • Ensure that money is available to make monthly credit card payments by securing a certificate of deposit backed credit card or installment loan
  • Do not max out, or come close to maxing out, credit cards or other revolving credit accounts
  • Review your credit report regularly and fix any errors
  • Pay down debt rather than just moving it around, as well as not opening many new accounts rapidly
  • Check credit card and bank statements on a regular basis for fraudulent activity

For questions, we invite you to visit a nearby Arvest Bank branch or call us at (866) 952-9523. 

¹ Experian Highlights Generational Gap on Debt:  Generation X Tips the Scales Just Above Baby Boomers with Debts and Boomers Boast Much Higher Credit Scores.
² Second Annual Survey of Consumer Knowledge About Credit Scores Reveals Considerable Improvement but Also Costly Misunderstandings.


Tags: Credit Cards, Credit History, Financial Education, Press Release
earthshoes on 7/25/2012 at 3:48 PM
Messages like this bother me. In this economy, with job security as a thing of the past, there are better, safer ways to establish credit than using credit cards, which should be the last thing a young person adds to their financial tools, not the first. The first, most important thing a young adult can do is pay off their student loans in a timely fashion (consolidate if possible). This is less about credit scores and a lot more about learning debt management. Pay off all bills on time (for instance--cell phone bills and rent). While it won't necessarily boost one's credit score in and of itself, not paying them on time can lower it. Learning to live within one's means and paying one's bills on time is far more important than having a good credit score. Put money aside for things like down payments for first homes, new cars, etc. Learning to save is more important than having a good credit score. When a young person is sure they're ready for it, open an account at a credit union (sorry Arvest, I love you, but it's a fact) as they are often more open to loaning money to young people who have little or no credit than banks are. Then (after first applying the down payment the young person should have saved) take out a secured loan with them--like for a reasonably price used car. Pay off the car as quickly as possible. Until a young person has been employed steadily for four or five years (preferably at the same job) and does not "need" a credit card, they have no business with one. Parents like myself have worked hard to teach our children about debt management, often based on our own fiscal ups and downs. These young people who have opted not to use credit cards didn't just reach the conclusion that credit cards are a trap on their own. We taught them this because we want to protect them from both repeating our mistakes and those who are currently sitting in bankruptcy courts across the US. ---signed a member of the sadder but wiser crowd

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