Why millennials are less creditworthy now than Gen Xers were in 2001

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Millennial credit scores are lower than when Generation X consumers were coming of age, reflecting changes in credit consumption and other consumer behaviors.

In 2015 — the year the youngest millennials turned 21 — 43% of the demographic had subprime credit scores. By contrast, in 2001 — the year the youngest Gen Xers turned 21 — 35% of that demographic had subprime credit scores, according to a TransUnion study.

A delay in life cycles has affected the creditworthiness of millennial consumers, who more commonly attend college and prolong both marriage and career starts. It is also more typical that they live at home with their parents.

These factors affect the role of millennials as consumers, who are applying less for credit cards and mortgages than Generation Xers were at the same stage. About 5% of millennials age 21 to 34 obtained mortgages in 2015, compared to nearly 10% of Gen X consumers between 21 and 34 in 2001.

To combat this, mortgage lenders need to adapt their strategies to changing consumer behaviors, according to Ezra Becker, senior vice president and head of global research and consulting at TransUnion.

"We are a product of our times," said Becker. "Lenders' approach to marketing, their approach to product structure, their approach to communicating and engaging customers must change over time because people's environments change."

Millennials' lower credit profiles are exacerbated by more conservative underwriting for mortgages and other forms of credit, which makes it more difficult to obtain loans.

Though delinquency rates are lower, tighter underwriting signifies millennial buyers are held to higher standards than previous generations.

In 2001, the average U.S. credit score of all mortgage borrowers was 686, according to CoreLogic. As of the beginning of this year, the national average credit score for borrowers was 741, a 55-point difference, and with notably higher standards in underwriting.

Card usage trends also share blame in weaker creditworthiness and scorability among millennials, who have shied from credit and private label cards in favor of debit cards.

Only about 36% of millennials in 2015 held private bank cards, compared to approximately 67% of Gen Xers who carried them in 2001. Debit card transactions grew from 8 billion in 2000 to 60 billion in 2015, while credit card transactions only grew from 16 billion to 34 billion in the same period.

Another factor contributing to the decline in card usage is the Credit Card Accountability Responsibility and Disclosure Act of 2009, which limits credit card marketing on college campuses.

As of July 2016, 67 million people make up the U.S. millennial generation, and represent about 25% of the nation's overall purchasing power.

"They are an enormous segment of the population in terms of volume, and really, lenders need to be looking forward. Today's millennials are tomorrow's top earners and spenders and credit-users, so you have to look ahead if you're a lender, to give you a pipeline of prospects and relationships," said Becker.

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Credit scores Credit reporting Underwriting First time home buyers Credit cards Transunion CoreLogic