Millennials are financially cautious, and that could be making it harder for them to get low-cost loans or credit cards.
Unlike older generations, many millennials are reluctant to take on new debt even as their finances improve, according to new research from VantageScore provided exclusively to USA TODAY. The problem is lenders still consider these conservative borrowers with fewer credit accounts as riskier.
As a result, these debt-shy millennials likely get worse loan terms, like higher interest rates and lower credit-card limits when they do apply.
In some cases, they may even be denied credit altogether if their histories include too few accounts.
“This is a pretty prudent group of people,” says Barrett Burns, president and CEO of VantageScore, a developer of a credit score. “They tend to be more creditworthy than what their history suggests,” he says, adding “Maybe lenders need to rethink their lending criteria based on the data we’re seeing.”
Typically, when a person makes more money and has more savings, they add credit such as signing up for a new card or taking on a car loan. That’s because they’re confident they have the financial wherewithal to pay back the debt.
That means people who have more credit accounts tend to have higher incomes and assets. And those with few credit accounts usually have lower incomes and assets. Those trends are true for the silent generation, baby boomers and Generation X, according to VantageScore’s research.
But that doesn’t hold for millennials, VantageScore found. Millennials with fewer credit accounts have slightly higher or equal levels of income and assets than those with more credit accounts.
Borrowers with three or more active credit accounts – called thick-file borrowers – are considered less risky by lenders and receive the best terms. Those with fewer than three accounts – called thin file – are considered riskier and get higher interest rates and lower loan amounts.
But this may be an antiquated way of comparing borrowers, Burns says, given that many thin-file millennials have more, or at least the same amount, of income and assets as their thick-file counterparts.
Many are just focusing on paying down student loans before taking on new debt, he says. Overall, these debt-shy millennials are good borrowers, but they aren’t given the benefit of the doubt by lenders.
“The message for lenders is they need to lean into this demographic and create the type of financial products that works for them,” he says. “Maybe a secured credit card for someone new to credit with a low limit may not be suitable for this group.”
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