Why Don’t Millennials Take Out Credit?

Posted by Beth Jennings in Personal Finance on 16 May 2018

As a millennial, it can feel like my generation is besieged with criticisms on a daily basis, and not all of them are entirely fair (though lots are). We are frequently told that as a generation we are entitled, we have it so much easier than our elders and arguably, worst of all: we buy too many avocados. While I don’t buy avocados, I do have access to credit, which makes me a minority among my age group.

As few as 1 in 3 people aged 18-34 have a credit card, according to a 2016 survey. There could be a number of reasons behind this, one of which could be that millennials are characteristically a lot less likely to take perceived risks when it comes to credit. But could this unwillingness to think of credit positively could become a serious handicap later down the line?

Lack of education about credit

One potential reason is that most millennials have never been introduced to credit. While there are lessons in school on seemingly every other basic life ‘essentials’ these days (the mitochondria is the powerhouse of the cell), credit and finances never really seemed to come into it. Though it should be mentioned that in more recent years it does appear to have entered the curriculum as part of the “Citizenship” lessons carried out by a number of schools, so hopefully Generation Z (also known as iGen until something catchier comes along) will be better prepared than we were.

Maybe it shouldn’t need teaching – after all, it seems common sense to pay your bills, live within your means and to not use money that isn’t yours. Whilst correct and admirable, on their own these ideals don’t always leave young people in a strong position when it comes to borrowing for home ownership, car finance or other types of credit.

When embracing credit for the first time, it can be easy to get lost in the terms and vernacular used, so you might find our Jargon Buster of frequently used terms helpful. If you’re applying for your first loan or credit card, you can book an appointment with your bank to talk through everything. Being new to this world is nothing to be ashamed about, remember: everyone starts where you are!

More traditional forms of finance aren’t being taken up

With the exception of perhaps store credit cards, many millennials are less likely to be exposed to products usually associated with finance. This could perhaps be seen as a shift in priorities for our generation more than a complete lack of appetite for the ‘finer things’ in life.

Don’t have car, will travel anyway

Many millennials do not have or need a car; this could be because of the number that now work in cities where car ownership is impractical, but on top of that, cars are expensive to buy and run. Even with the most attractive finance packages, paying a monthly amount for a car, then insurance, road tax, fuel and maintenance on top of rent and other expenditures is often more than many young people can commit to.

The lack of automotive ownership has helped pave the way for a number of alternatives to cars and public transport, with ridesharing platforms such as Uber and Lyft offering a more convenient service at a lower rate than a traditional taxi to those in urban areas, so even if you don’t have a car you can probably still make your way around if you’re not flush with cash.

For those that need a car and don’t want to spend a lot of money, you can easily pick up a bargain if you’re not being too aspirational about the badge on the bonnet. If you buy a car that’s 10-15 years old today it’s still likely to have ABS, air bags, decent fuel consumption, an Aux port and a reasonable safety rating. Compare that to the second hand bangers on the market when these cars were new and you’ll notice dramatic increase in what’s included on even some of the cheapest cars out there.

Often these cars are so cheap that many people won’t even need a finance package, so for many it’s possible to own and run a car without having to make a monthly contribution to pay off its loan.

Lower (and later) homeownership = fewer mortgages

Homeownership among young people has plummeted in Britain and this is hardly surprising considering the state of the housing market for those trying to get on to the property ladder for the first time.

Wages have plateaued, house prices skyrocketed and the average disposable income has become so small that saving for a house deposit is a somewhat traumatic experience, least of all for millennials, who have turned up to the party so late that while everyone else is wearing lampshades on their head, they’re still in the doorway clutching a quiche.

But without this ‘foot in the door’ to homeownership, many will not encounter a mortgage until later in life, if indeed they do at all.

Every life experience you walk away from is a good one

Most millennials have been through at least one recession during their lives (don’t forget the recession of ’91, kids!), which might help explain why our natural instincts tell us to save whenever possible and put off larger purchases and life events (such as buying a house) until later in life. But that also means that for most, the incentive to borrow money might not rear its head until later in life as well.

Weddings are a prime example of this: recently the average age for a woman to get married was put at 35, while in previous generations this age was at the mid-late 20s. While there are undoubtedly a plethora of reasons for this, the ever-increasing cost is likely to be a leading reason.

With the average wedding in 2018 set at around £15-20,000 and the average deposit for a house coming in at about the same price, for many people it’s the case of ‘one or the other’, or at the very least there’s likely to be a healthy period between the two events to financially recover.

For those who have been through university as well (estimated to be more than half of people this age), the idea of adding further debt on top of student loans might be enough to make people think twice, but it shouldn’t be a reason to not take out finance: loans and student loans are treated very differently when it comes to your credit file.

How can this lack of credit affect millennials?

One of the single most important pieces of information on your credit file is your previous credit history: what you’ve borrowed, whether you’ve repaid in full and on time, plus any serious issues. But in the absence of this information (basically, if you’ve never been a borrower) there’s very little for future lenders to base their decision to lend to you on, which can seriously affect the likelihood of getting accepted for credit, especially for larger loans or mortgages.

Until recently, rent payments were not reported at all on credit reports, and without other credit agreements to demonstrate your ability to manage credit, getting a mortgage can be a difficult task for the those already dubbed ‘generation rent’.

Does that mean the future of the house ownership and traditional forms of borrowing are on a permanent downward trend? Perhaps not. Maybe like Uber and Lyft, the right solution for our generation just hasn’t appeared yet.

Regardless of your age, circumstances or income, if you’re thinking about applying for credit, it’s essential that you check your credit report first. It will allow you to see what lenders and can help you address any issues before you submit your application.

If you haven’t already, you can try checkmyfile FREE for 30 days. You can cancel at any time online, and after the trial, it costs just £14.99 a month. You’ll get complete access to the UK’s most-detailed credit report, with information from 4 Credit Reference Agencies, not just 1 plus speedy, expert support should you need it.

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