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By Ashley Finke

Listen Up, Millennials: Credit > Debit

July 30, 2015

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Part 1Part 2Part 5

Don’t alert the presses. Don’t start tweeting. The following is NOT breaking news: Millennials aren’t entering the housing market. We know this. We’ve been talking about this since 2008. However, market experts, reporters and bloggers have been too quick to attribute this shift away from homeownership to the fact that student debt is at an all-time high ($1.2 trillion total), millennials continue to experience slow growth in the job market, and we have been dubbed the laziest generation to grace the face of the earth.

Still, I’m not sure we are telling the whole story here. Yes, student debt levels are astronomical, millennials like to job-hop (though not any more than other generations), and maybe we like living with our parents a little more than we should. While these factors might contribute to the conversation about millennials and their real estate choices (or the lack thereof), what about the most important influence on mortgage financing? What about credit?

With an average credit score of 628, millennials have the lowest credit rating of any generation today. When the absolute minimum credit score required for approval through Fannie Mae or Freddie Mac (the biggest providers of mortgage financing in the U.S.) is 620, and a ten percent down payment is required for Federal Housing Administration (FHA) loans to buyers with scores between 500 and 579, it’s no wonder millennials aren’t entering the housing market.

Not only do we have weak credit scores, but millennials have not been educated about these incredibly important three-digit numbers. About half of all Millennials have ever ordered a free copy of their credit report; 19 percent have never even checked their credit score. Only 6 percent could pick every factor from a list that affects a credit score.

The reality is, we millennials don’t seem to realize the importance of building credit. We opt to use debit and pre-paid cards instead of charging and paying off a credit card. Those who do have credit cards use them too much (average utilization for Millennials is 37 percent when, ideally, the recommended percentage should be under 30 percent), and only 40 percent of us pay our debt in full each month. Also, delinquency rates on auto loans for Americans under 30 have been climbing faster than that of any other age group.

These habits are keeping us from achieving the American dream. Whether it be a white-picket fenced faux Tudor in a small New England town or a high rise condo in a city center, owning a home is something to which many Americans aspire – and the mortgage-interest deduction makes it a sensible choice for reducing tax burden. Having a good credit score is essential to achieving home ownership, because the strength of your score determines the kinds of loans and interest rates for which you can qualify. Credit scores are important not only to homeownership, but for securing other types of loans, like auto or personal loans. Additionally, employers look at credit scores when making employment decisions; having a good credit score shows lenders and employers that you are thoughtful and responsible when it comes to handling your personal finances and paying your bills.

Why aren’t we more concerned about this? How have we become credit averse to the point where we forego building equity (and a key component of wealth) in favor of continuing to rent our homes or live with our parents? Although some of our parents may have really comfortable sofas, perhaps a better answer is because as a nation, across all generations, we don’t know enough about credit scores, how they’re calculated, or why they’re so important. We will dissect the basics in part two, coming tomorrow. Meanwhile, take this quiz to see how much (or how little) you know about important credit topics. Then come back to Currency of Ideas to learn the essentials of credit, with a focus on the needs of millennials.


Ashley Finke was a summer intern for the Milken Institute Center for Financial Markets in 2015.


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