Millennials are one of the largest demographic groups in the U.S. It is estimated that by 2020, one in three adults will be millennials. Yet, unlike past generations, this group appears to be less active in traditional credit and financial markets. With 33% being under–banked and 63% not have having credit cards.
Millenials do in fact apply for credit, but are denied at a much higher rate than their generational counterparts. Why?
Younger consumers are typically part of the “thin-file” population at the national credit bureaus, and the millennials’ slower participation in the credit market is keeping them in the thin-file population longer. According to the CFPB, young adults are likely to be 'credit invisible', meaning their lack of credit history renders them virtually unscorable based on traditional credit scoring methods, however when looking at actual credit behaviors, Gen X and Baby Boomers are actually 3 times more likely to miss credit payments than Millennials!
Traditional credit scores, like FICO credit scores, are calculated based on mortgage, credit card, auto loan and other installment loan payment histories. Data released by the Federal Reserve Board of New York shows that nearly 40 percent of people below the age of 30 years have a FICO score below 621, putting many of them in the subprime category, while others do not have credit scores at all.
Traditional credit scores have proven to be valuable predictors for previous generations; however, they may not provide the most accurate assessment of credit worthiness for the millennial demographic. This limited view hinders many lenders from understanding the true opportunity of millennial applicants and often results in credit declines or unattractive offers that are rejected by the consumer (i.e. higher interest rates, deposit requirements, limited features).
Fico 9.0 addresses this new concern toward “thin files” in hopes to better analyze this younger demographic, but will it be enough? Only time will tell.