Generational Credit Preferences
"Mom and Dad are so out of touch." "Kids today think they know everything." Sound familiar? Most aspects of life have some form of generation gap, as different experiences alter perspectives.
A recent study by the credit bureau TransUnion explored one of these generational differences – credit usage and preferences between Generation X (born from 1965 to 1979) and Millennials (born from 1980 to 1994). The study found that, relative to Gen Xers, Millennials are less likely to use credit cards and more likely to use personal loans and auto loans as forms of credit.
By comparing credit origination rates for both generations during the same point in their lives (ages 21-34), the study reported a 22% decrease in bank-issued credit card originations and a 10% decrease in private-label credit card originations with Millennials compared to Gen Xers. Meanwhile, Millennials took out 21% more auto loans and almost twice as many personal loans as Gen Xers. If you are interested in an auto or personal loan, visit our curated list of top lenders.
TransUnion suggests that technology, or "digitalization," is a significant factor behind the changes. However, while technology may divide the generations, other experience factors have also contributed to both Generation X and Millennial approaches to credit.
Cautious With Credit
In the study's press release, TransUnion referred to Millennials as "the first generation to be fully immersed in mass-market digitalization." Technological advances have made it easier to shop for cars online, opened up new online financial avenues for acquiring auto and personal loans, and made it easier to apply targeted advertising to pitch these services.
However, Millennials may simply be more cautious with credit out of experience and necessity. The housing crisis and subsequent Great Recession hit just as many Millennials were entering their careers – or attempting to do so – with many of them burdened by significant student loan debt. Not only were they affected by the subsequent tightening of credit, they saw first-hand how overextension of credit or excessive mortgage debt led to financial hardships.
As a result, responsible Millennials are wary of accumulating more debt, and may have a natural aversion to the open-ended revolving debt that credit cards represent. Throw in the CARD Act of 2009, which limited credit card marketing to college students, and it's no surprise that credit card originations are down. Both motivation and access are decreased compared to Generation Xers who were bombarded by credit card applications with few restrictions.
Not surprisingly, Millennials also show a lower home ownership rate, with 47% fewer mortgages than Gen Xers at the same point in life. Generation X came of age during easy credit and a housing boom, when larger mortgages were encouraged and housing was viewed as more of an investment thanks to rising home prices.
Millennials still see homeownership as a goal – a separate TransUnion study in July showed that almost three-quarters of Millennials plan to buy a home in the future – but given their experiences and observations, they're more likely to size it properly and plan for the purchase in greater detail. That care may delay the first purchase of a home.
You May Have a Point
Each generation can learn a bit from the other in the use of credit. For example, Millennials are wise to approach credit carefully given their experiences, but they could learn credit optimization techniques from Generation X. Credit cards are an important part of establishing the good credit history that Millennials need in order to receive better interest rates on their preferred loans. Credit cards are only a problem if you spend more than you can pay off at the end of each month and incur interest charges.
By having multiple cards and managing them wisely (keeping overall credit utilization low and targeting purchases toward rewards programs), Millennials could use their conservative approach to build a better credit score, thus aiding their ultimate goal of buying a home. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips.
On the other hand, Generation X would benefit from the variety of tracking tools, credit alerts, and other financial conveniences that are second nature to Millennials. Technologically speaking, it's easier than ever to be fiscally responsible. Mobile devices allow you instantaneous feedback on your finances and give you more tools to resist impulse purchases – if you use them.
Maybe Mom and Dad do know a few things about life after all, and maybe the kids can teach Mom and Dad a few things about the convenience of today's technology. Consider having a family talk about credit and how to use it wisely and most efficiently. It may not be as entertaining as the family discussion on summer vacation plans or where the kids will go to college, but it's a useful conversation to have.
As your children grow into adulthood, keep that conversation going. Your kids need you to provide advice while allowing them to grow and make their own mistakes while they establish their credit and determine their own preferences. Meanwhile, don't shy away from asking your children for help on the most efficient way to use online tools. Share your experiences with credit, both good and bad, and you can help to bridge at least one generational gap.
As for music, entertainment, hairstyles, fashion, and other typical generational clashes, we'll let you figure those out on your own – but the same philosophy of good communication and shared experiences should help you solve those clashes as well.