Millennials aren’t perfect and neither are their credit scores, but lately it seems as if many think they should be.
Every time an organization or individual reviews millennials’ credit scores and dissects their credit behavior, the most common reaction to the findings is surprise. Then, experts start outlining what millennials are doing wrong and should be doing differently. News headlines such as, “Credit card mistakes are costing millennials,” “What millennials are doing wrong with credit” and “What millennials should not do with credit” are just some of the latest I’ve seen.
Recent reports have said millennials’ credit scores are lower than other generations, including a July 2015 Experian study that found people ages 19 to 34 had a 625 average credit score, compared to 650 for Generation X (ages 35 to 49) and 709 for baby boomers (ages 50 to 69) and older. Millennials also tend to use more of their credit limits, apply for inappropriate cards or disengage from credit altogether.
Are there things millennials could be doing better regarding credit? Definitely. However, I don’t think we should still be surprised that millennials’ credit isn’t as good as that of older, more financially experienced individuals.
Since I’m 24 years old, this could sound like a defense on behalf of my peers, but I want to share my millennial perspective on “what’s wrong with millennial credit scores.” I think there are numerous factors to consider when evaluating our credit scores and credit card engagement (or lack thereof) that call for more understanding rather than parent-like scolding.
Credit scoring doesn’t favor young, new credit users
Millennials can’t really control too much of how credit scoring systems perceive them. Their credit profiles are often young and leave little wiggle room for error. “Lower scores are likely because millennials have thinner credit files than their older counterparts, so any missteps such as skipped payments or high credit utilization hurt more,” Michele Raneri, vice president of analytics for Experian, explained to CBS News.
Even responsible millennial cardholders still may have other score factors working against them. FICO scores, which are used in 90 percent of lending decisions, consider payment history most important, followed by the amount of debt owed and length of credit history. So, it makes sense that debt-burdened young adults with short credit histories have fewer cards and lower scores. Everyone has to start somewhere.
Millennials are old enough to remember the effects the Great Recession had on people’s finances and, as a result, may be hesitant to take on unnecessary debt. I think Business Insider analyst John Mauldin does a great job explaining this debt aversion in this column, and I can relate.
In high school I watched my father struggle to hold his architecture business together as the Great Recession settled in and people stopped investing in property and building new structures. My mother was laid off from a teaching job not too long before that. I’ve seen how holding debt can make hard times harder. As a result, I still get nervous when I see my own bills and think about how I would handle them if times got really tough.
Student loan overload
Millennials may not want debt, but if they went to or are still in college, they probably hold an average of $26,700 in student loans, according to an April 2015 report by the New York Federal Reserve. The national student loan debt balance has now reached $1.27 trillion and there’s no indication that it will stop rising anytime soon.
If a young adult has student loan debt to manage, he or she will have less disposable income to pay off any existing credit card debt efficiently, which could explain why Experian found some millennials carry balances that take up more of their credit limit than the average cardholder. It may be in their best interest to pay off higher interest credit card debt first, but no one can do everything at once. I just finished paying off some residual credit card debt I’ve been carrying since I graduated college almost two years ago.
Plus, student loan debt coupled with entry-level incomes can make a young adult wary to take on any extra lines of credit or loans, no matter how much it may benefit their score or future lending options.
Learning from mistakes
I definitely made mistakes with my first credit card, such as charging too much and carrying a balance from month to month. I remember forgetting a credit card payment here and there during college and paying late fees. However, I’ve learned my lessons, and it’s been years since I’ve goofed up like that.
Newer stats show millennials may be applying for cards that are not the “right fit” and using them in less-than-ideal ways. While this can be valuable information millennials can learn from, I think it’s unfair that the primary messages they receive are, “You must use credit cards!” and then followed-up with, “No, stop! You are doing it wrong!”
Of course it’s not a good idea to quickly dive into credit cards and rack up a bunch of debt, but I think it’s OK that many millennials don’t know exactly what they are doing at first. Managing credit is a learning process, like driving a car. When you first get your license, you may drive too fast, but after a few speeding tickets and threats from your parents, reality starts to sink in. You learn your lesson and start driving a bit more carefully.
Overall, good things take time, including building a well-rounded, strong credit profile. Instead of dissecting every part of millennial credit, give us a chance to find our financial legs and make some improvements before nitpicking our credit scores once again.