Some 58 percent of Millennials (ages 23-38) have been denied at least one financial product due to their credit score, according to a recent Bankrate.com report. That compares with 53 percent of Gen Xers (ages 39-54) and 27 percent of Baby Boomers (ages 55-73). Prospective borrowers are most often rejected for credit cards (36 percent of millennials/28 percent of all U.S. adults), followed by auto loans (18 percent of millennials/13 percent of all U.S. adults).
Why it’s happening
I attribute millennials’ difficulty obtaining credit to three main reasons:
Student loan debt: Millennials’ struggles with student loan debt have been well documented. Collectively, Americans owe $1.56 trillion in student loans, which is about $500 billion more than they owe on credit cards, according to the Federal Reserve. Hefty student loan bills raise one’s debt-to-income ratio, which makes it harder to qualify for new loans and lines of credit. Millennials are hit with a double whammy because they’re earning early-career salaries. A lot of debt and a lower income is a tough combination.
Aversion to debt: Because of their student loans and because they’re scarred from coming of age around the time of the Great Recession, many millennials are scared to take on additional debt. Older millennials may also have been affected by the dot-com bust and the related recession in 2001. These debt fears are well-intentioned, but the problem is that you need to establish a solid track record to earn a good credit score. You can’t just wake up one day after using your debit card exclusively and expect to qualify for a mortgage or a car loan with a low interest rate. You need to put in the work of building credit and demonstrating positive payment habits.
Unintended consequences of the CARD Act: Among other consumer protections, the CARD Act (which went into effect in 2010) pushed credit card marketers off college campuses and set 21 as the minimum age for obtaining a credit card (with some exceptions). This was meant to prevent the situation that so many Gen Xers fell into: An attractive marketing rep got them to sign up for a credit card on the quad in exchange for a T-shirt and then they racked up a ton of debt. Avoiding that is a good thing, however, many people today are having trouble getting credit cards at age 21, 22 … even 25. As I mentioned above, it often takes credit to get credit, just like it’s much easier to get a job when you have relevant work experience. But how do you get that experience if no one’s willing to give it to you?
Why it’s important
Let me pause for a second to underscore why all of this is so important. Even if you’re afraid of debt, it’s impractical to stay off the credit grid for long. You’ll have a very difficult time renting an apartment, for instance, if your credit is bad or nonexistent. Cell phone providers and other utility companies often check credit scores when you open service plans and could require significant deposits if the results are unfavorable. Many employers even check prospective employees’ credit reports before extending job offers. And then, of course, there’s the fact that you’ll probably want a credit card, auto loan and mortgage someday.
So what can you do about it?
Authorized user status: Ask your parents or someone else that you trust to add you to one of their credit card accounts as an authorized user. As long as they use the account responsibly (paying on time, keeping their debts low, etc.), you’ll benefit from your association with this account. An added bonus is if you use this authorized user status as a learning experience. Paying with a credit card is different from paying with a debit card or cash. Get comfortable with the distinction and take advantage of training wheels such as American Express allowing primary accountholders to set individual credit limits for authorized users.
Sign up for a credit card that’s easy to get: I recommend Apple Card and the Petal Card for people who are building or rebuilding their credit. Both accept a wide range of credit profiles, they don’t charge any fees and they provide helpful financial management tools. Secured cards are another good option. Cardholders put down a deposit (often a couple hundred dollars) that becomes their credit line, so there’s little credit risk. You need to come up with additional funds to pay your card off each month. If you use a secured card responsibly for 6-12 months, your credit score should improve significantly, and you’ll probably be able to upgrade to a traditional/unsecured card. Many banks and even Amazon.com offer secured cards.
Opt for a credit builder loan: Many credit unions extend these loans, which are really a form of forced savings. Expect to aside payments for 6-24 months. At the end of the term, you’ll get to keep almost all of the money (there are usually minimal fees). As long as these payments are reported to the credit bureaus, you’ll come away with a higher credit score as well.
In summary, even though many millennials are having trouble getting established with credit, there are concrete steps they can take that will bring tangible progress within a few months.