A good credit history is crucial when it comes time to take out loans or invest in big purchases such as homes and cars. To many creditors, a person with no credit history is just as unreliable as one with bad credit because there are too many unknown risks. Unfortunately, many Gen Y-ers face the problem of having no credit history or a poor one and struggle to secure large purchases.
Some blame the challenging job market for this – according to a Pew Research Center study released in 2010, about 37 percent of 18- to 29-year-olds have been underemployed or out of work during the recession. Others blame the mountains of student loan: The Project on Student Debt found that the average debt for graduating seniors with student loans was $23,200 in 2008. And then there are the helicopter parents who give their adult children too few opportunities to manage their own finances.
Another contributing factor may be the technologically advanced world in which Gen Y is raisedthe social pressures and inclination to overspend on high-tech items keep adolescents from saving money. And lastly, Gen Y’s unfamiliarity with credit card usage may partially because the Credit Card Accountability Responsibility and Disclosure Act of 2009, which restricts card issuers from giving a credit card to anyone under the age of 21 unless they can prove they have enough income to pay.
“The whole credit system is pretty overwhelming, mainly because in the past few years I’ve been facing problems with student debt and the mortgage crisis” said 22-year-old Jimmy Cheng, a first year investment-banking analyst at Merrill Lynch & Co. “There are too many consequences regarding credit when it comes to debt and paying off mortgages and loans.” Though Cheng has a secure job at a high-paying firm, he doesn’t want to risk damaging his credit rating by failing to pay off all of his student loans on time – on time meaning within the next two years.
According to credit bureau Experian’s third annual credit study, Gen Y has the lowest average credit score – 672 on the VantageScore scale, which is nearly 80 points lower than the national average of 751. This is the result of the “get-it-now, pay-for-it-later” mindset that Gen Y-ers tend to embrace, because often the pay-for-it-later part fails to follow through. According to a survey by the National Foundation for Credit Counseling in 2010, only 58 percent of Gen Y-ers pay monthly bills on time. “Many financially inexperienced consumers seek instant gratification by making impulsive credit card purchases resulting in debt that they cannot afford to repay,” said Eboni Nelson, a University of South Caroline law professor who did an analysis of the Credit CARD Act of 2009. “But failing to pay off the entire balance due every month can lead to substantial late and overdraft fees, which can have negative consequences on young consumers’ credit histories.”
Daniel Shin got his first credit card during his senior year of high school. The now 23-year old NYU Langone Medical Center research technician just recently relied on his good credit score to buy an apartment in the city. But Shin’s score wasn’t even built by large purchases. It was just an accumulation of small everyday buys. “You don’t necessarily have to make big purchases – I use my credit card for small daily purchases, and as long as I pay it all back on time, it builds up,” he said.
But not all young adults are as prepared as Shin. Many are financially dependent on their parents, as they still live under one roof. A Pew Research Center report series found that more than a third of all Millennials – people ages 18 to 29 – depend on financial support from their families, including 14 percent of all young adults who are working full time. Another survey from the center conducted in found that 13 percent of those ages 22-29 have moved back in with their parents after living on their own because of the current recession. This trend of living at home as a young adult has led to fewer Gen Y-ers having to manage finances on their own, and fewer Gen Y-ers taking responsible loans that would raise their credit scores.
But the biggest factor that leads to failure in establishing credit is often pure unawareness. For whatever reason, adolescents are not so familiar with credit anymore. According to the Charles Schwab 2011 Teens & Money Survey, only 39 percent of surveyed 18-year-olds know how to manage a credit card. One possible reason may be the installation of the Credit CARD Act of 2009. “We don’t market actively to students anymore and no longer offer a student credit card program” said Kristin Lemkau, head of marketing and communications for investment banking at J.P. Morgan Chase. The company has not used student mailing lists since 2006 and also ended student-focused campus marketing in 2007 and alumni-focused marketing in 2008.
“If Gen Y-ers are going to get a credit card, they need to realize that there is a lot of responsibility that comes along with its use,” Nelson said. “Failure to recognize this and act accordingly can result in young consumers making bad financial choices that can affect their financial futures for years.”