George Bernard Shaw reportedly said that it’s a pity that youth is wasted on the young. But being young isn’t always all it’s cracked up to be, particularly when it comes to personal finance issues such as credit. Millennials – those born after 1982 – have unique credit challenges that are only now beginning to be addressed seriously. If you are young and find yourself struggling to build credit, you’re certainly not alone. It’s important that you know about the options that are available to you so you can make fully informed choices.
The millennials’ “catch-22”
A “catch-22” – the term comes from a 1961 novel by Joseph Heller – is a situation from which a person can’t seem to escape because of contradictory rules. It’s an apt description for the quandary faced by many millennials, who often can’t get financing because they don’t have credit, and can’t build a credit record because they can’t get financing.
A study by the charity Toynbee Hall and the employee loan firm SalaryFinance found that younger borrowers are missing out on the cheap-credit boom and instead are turning to more expensive choices, such as payday loans, because their poor credit scores lock them out of the best deals.
It’s no secret that conventional lenders and credit card providers are offering very attractive rates for people with good credit. Rates on personal loans have fallen to record lows, with several major banks currently offering personal loans of up to £15,000 at an interest rate of only 3%. And Virgin Money recently introduced a credit card offering customers 30 months of interest-free borrowing.
But not everyone is able to take advantage of these low rates. Whilst older borrowers are often able to get approval for these great deals, millennials by and large are paying more. They are much more likely than older borrowers to have poor credit records. This is for a variety of reasons, including the lack of a track record of payments.
Toynbee Hall’s research manager Carl Packman said that many young people are finding it difficult to access the type of mainstream finance that helps to build their credit score. Given this dearth of choices, combined with the pressures of low-wage jobs and increased insecurity, it’s little wonder that so many millennials are turning to more expensive “alternative” financing.
Asesh Sarkar, the chief executive of SalaryFinance, noted that millennials are set to make up 50% of the global workforce by the year 2020, so “there is an increasing need for employers to step up and support this group of workers who are cut out of mainstream finance.” Sarkar added that the government has finally begun to identify the problems of the “just about managing (Jams)”, who are working but have less than a month’s worth of savings in the bank. Clearly there is an urgent need for better financial support systems for struggling workers of all ages, but particularly for younger and more financially vulnerable ones.
In the meantime, what can you do to get yourself out of the millennial credit rut?
Consider all of your options
The authors of the Toynbee Hall/SalaryFinance study mentioned above observed that many millennials turn to alternative financing such as payday loans, which, they noted, can have a detrimental effect on their credit. If you find yourself in a financial bind, you should explore all of your options for financing: your bank or building society, a credit union, perhaps even a trusted friend or family member.
Sometimes, though, a short-term high-interest loan may be the best choice if you need to borrow a relatively small amount of money and can’t get financing any other way. And it can actually be less expensive than taking out a personal loan for a longer period. If you manage the loan prudently – that is, you don’t borrow more than you need, and you make every effort to pay it back on time without rolling it over for another period – you won’t sabotage your efforts to build a good credit history.
But not all lenders are alike, and there are several factors to consider before choosing a lender. The APR is important but not the only factor; also make sure you won’t be hit with “surprise” fees, and that the lender has a good customer service record. Even if you’re just borrowing a small amount of money, you need to shop as carefully as you would if you were taking out a large loan. And keep in mind that any type of loan or financing you take out will affect your credit history.
Which brings us to the next and arguably the most important point of all.
Work to build your credit history
It’s never too early (or too late) to begin building a good credit history. Start by educating yourself on the basics. It’s important to know about the credit reference agencies – Experian, Equifax and Callcredit are the three main agencies in the UK – and the information they collect about your financial dealings.
It is also important to know exactly what your credit report is used for. Banks and building societies use it to help them decide whether they should lend to you and what sort of rates they should offer, and credit card providers use them to decide whether to extend credit to you. But as you may know, prospective employers and landlords often use these reports as well to help them decide whether or not to hire you or rent to you. Your credit report can affect many areas of your life that aren’t directly related to financing.
You also need to know the essentials of maintaining a good credit history. These include making sure you’re registered on the electoral register from the age of 18; managing your bills to avoid missed payments (and contacting providers immediately if you do miss a payment); and borrowing only what you can afford to pay back. The Money Advice Service page linked to above has links for further information on how young borrowers can build and improve their credit.
Perhaps government policies and programmes will eventually catch up to the needs of the new generation of borrowers. Meanwhile there is a way out of the notorious credit catch-22, if you’re smart about choosing and using every tool available to you, and if you make building credit a priority.