College season brings credit challenges for students
As millennial college students get acclimatized to another year of academia, technology has made it possible for them to stay connected to home more than ever.
And they will need to be, a new blog post from ID Analytics reveals.
Millennials, who make up a significant percentage of college students, are increasingly likely to rely more upon their parents for financial aid than previous generations. According to Bankrate.com, one in three millennials are unfairly underbanked, and 63 percent do not have a credit card.
It’s not for lack of trying.
“It is not because millennials are not applying for credit cards,” ID Analytics Vice President of Credit Risk Solutions Patrick Reemts said. “Our data shows they are applying at rates similar to other generations.”
But they are hearing ‘no’ more often than other generations, and, if left unchecked, it could affect the American economy for decades moving forward.
People commonly establish a credit rating by making smaller purchases in their teens and twenties, such as furniture, a computer, or their first car. More and more students are unable to obtain credit for these purchases, so they either forego them or tap into the Parental Bank.
“We are seeing more boomerangs, those moving back home.” – Patrick Reemts
That is great if your last name is Rockefeller, but many parents already struggling with growing tuition fees may not be able to pay for anything else. That affects the family, and it affects the economy.
Now fast forward a few years. Those students have graduated from university.
They want to buy a car, rent an apartment or maybe buy a home. And furnish it.
But they encounter a problem, because they have limited, if any, credit history. Some take roommates, others move back in with parents. For many, life is not what they thought it would be.
“We are seeing more boomerangs, those moving back home,” Mr. Reemts explained. “We are also seeing a ton of retail credit applications for this group, but more are being denied.”
Some looking to certain marketplace lenders may be disappointed, Mr. Reemts said, for some are underwritten by traditional banks with traditional standards.
This lack of acceptance is having a misleading effect on the economy, Mr. Reemts said. Because fewer new entrants to the economy are getting credit, average FICO sores are rising, giving the impression of a healthier economy.
“Of course, if the good payers are the only ones getting credit the average score is going to go up,” Mr. Reemts said.
It is ironic this is happening to millennials, for more Americans that can actually get credit cards are using them more often, Mr. Reemts said.
“Credit cards were seen as a payment convenience, now they are a financial one too.”
It takes incredible discipline to not accrue interest charges, discipline not everyone has. That can lead to personal financial difficulty for millions of people, difficulty which multiplies if they experience job loss or a significant unplanned expense. Left unchecked this too can develop into another problem.
Mr. Reemts said institutional money has started to flow into the alternative finance space for several reasons. Innovation and technology have made it possible to profitably serve clients groups largely shunned by traditional lenders, who, through a combination of increased regulations and tight underwriting standards, have low participation in several verticals.
An increasing amount of money funding those loans is coming from institutional investors in search of yield.