Many Millennials become credit rejects through no fault of their own, according to a new ID Analytics study. It calls for using less traditional ways to measure loan risks.
The study says Millennials are denied financing at a higher rate, yet their payback record outperforms that of their elders.
Measuring demographics within the same credit score range of 600 to 700, the study says Baby Boomers and Generation X are two to three times more likely than Millennials to become delinquent on loans of 12 months and longer.
“There are a ton of safe Millennials out there,” Patrick Reemts, ID Analytics’ vice president-credit risk solutions, tells WardsAuto. “They are low risk and likely to pay back a loan.”
But Generation Y, consisting of people born between 1977 and 1994, can suffer from credit invisibility, meaning their credit histories are unscorable based on traditional scoring methods.
That can result in outright loan refusals or unattractive financing saddled with high interest rates, deposit requirements and limitations.
Young people can face the same old vicious cycle when it comes to trying to establish credit: You can’t get it without having a credit score, and you can’t get a credit score without having credit.
Traditional credit scores are based on various factors, including mortgage, installment-loan and credit-card payback histories. That’s a problem for Millennials who might not have engage in such borrowing.
For instance, 63% of people under age 30 don’t use credit cards, Reemts says. He cites various reasons for that, including a recent federal law that bars financial institutions from issuing credit cards to anyone under age 21.
Traditional scoring worked for previous generations, but can fail to provide accurate assessments of Millennial creditworthiness, he says.
“Given the financial and credit behavior we’ve seen among the Millennial population, lenders can no longer rely solely on traditional credit data and scores,” says Reemts.
He advocates using alternative credit data that gives lenders “a precise and unique view” of young-adult consumers.
Unlike traditional credit scoring, alternative scoring takes into account bill paying in areas that weren’t looked at before. Those include satellite TV, wireless and Internet services.
“Add those up and you could be talking about the equivalent of a monthly payment for a BMW,” Reemts says. “It’s a phenomenon.”
Alternative credit scoring also looks at peer-to-peer lending, subprime markets and address-change histories.
ID Analytics is a consumer risk-management service provider. It uses patented analytics to identify and assess borrower behavior.
“Essentially you’re trying to figure out if someone has disposable income and can repay a loan,” Reemts says.