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By Ashley Finke

Listen Up, Millennials: Credit > Debit Part Three

August 03, 2015

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Part 1Part 2Part 5

Remember the quiz (the one you probably failed) in part one? Try your hand at it again to see how much you’ve learned.

So what’s the real issue with millennials’ unconventional finance habits? The challenge is millennials’ credit scores are just shy of dismal because we’re forced to live within the constraints of America’s biggest financiers—Fannie Mae and Freddie Mac. Fannie and Freddie are government-sponsored enterprises (GSEs) that backed roughly 60 percent of new mortgages from 2008-2013 and had approximately 50 percent of the mortgage market in 2014. And yet they are using credit scoring models from the early 2000s. This means they aren’t taking into account the different ways our generation handles its finances. Nor are they considering the drastic effects of technology and social media on the personal finance space. And that has caused problems for the millions of millennials who want to buy houses.

Even though the regulator (the Federal Housing Finance Agency) of Fannie and Freddie has directed them to explore alternative credit score models, progress on this issue has been stagnant. Fannie and Freddie made commitments in September of 2014 to begin the process of studying and implementing newer scoring models, though Fannie Mae spokesman Andrew Wilson has said, “The costs for Fannie Mae, lenders and other market participants of incorporating new credit scores may be substantial”. That was almost a year ago, and yet … nothing. It is a widely held belief that a newer model would allow more Americans to have credit scores and consequently would allow them to enter the home-buying market. But the old geezers have left us hanging.

As we wait for the two largest U.S. mortgage lenders to get up to speed, millennials must consider the future of our credit scores independently of whatever updates Fannie and Freddie do or don’t make to their models. Though old-fashioned, the most reliable way to build credit is to apply for a credit card and use it. Don’t fear the plastic! With the advent of mobile apps and online banking, it’s easier than ever to make payments on a regular basis (every few days or once a week) and then pay the balance in full each month. Paying off balances as you go lets your credit card act as a pseudo-debit card and helps users avoid overdrafts or late payments. Staying current on your student and auto loan payments doesn’t hurt, either.

While only 36 percent of millennials are homeowners, (as compared to 43 percent of people who were under the age of 35 ten years ago), it is more important than ever for our generation to begin taking our credit seriously. Whether we hope to be homeowners in two years, 20 years, or never, building good credit is something we should strive toward to give ourselves the best prospects for whatever decisions we make in the future. A home is not a house without good credit.


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


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