Why do people automatically assume that if you are young you must be financially irresponsible?
Banks and credit card companies make the overgeneralization that if you're between the age of 18-21 you must isolated from the real world, unable to manage daily struggles and handle major responsibilities.
Not only are young people disproportionately underserved by mainstream financial products, but the ones that do qualify for credit are typically left with costly products, such as high-interest credit cards.
These products often set up young borrowers for failure, perpetuating the notion that they are too risky and should not be trusted with credit.
Age is Just a Number
Most young people are inherently cash-strapped given that they are new to the work force and have been in a prolonged period of heavy spending on education.
The train of thought goes as such:
Give an 18 year old access to credit and watch him spend the “free money” carelessly, defaulting on his payments and doing irreparable damage to his credit score.
While that’s an easy generalization to make, it is actually wrong.
A recent study by the Federal Reserve Bank of Richmond points out that individuals under 21 are less likely to experience serious defaults than older borrowers.
One main reason for this is that people that apply for credit at an early age do so with the sole purpose of establishing a credit profile, making them more likely to stay on top of payments. On the other hand, people who apply for credit for the first time later in life are more likely to do so out of necessity.
Time to Change the Lending Model
Let me make one thing very clear – we are NOT advocating blindly giving all young people credit.
Managing debt responsibly takes work, guidance, experience, and commitment. These habits take time to develop and are not always common among college students and early 20-somethings.
That being said, the answer is not to restrict credit to all young people, as the Credit Card Accountability Responsibility and Disclosure Act (CARD Act) of 2009 tried to do.
Instead, the solution is to provide smart, long-term financial products that help young borrowers take the right steps to establishing financial stability. It is important for the lenders to provide information, promote financial literacy, and reward borrowers that exhibit wise spending habits.
Some companies that are actually offering innovative financial solutions to new borrowers are Upstart, Pave, Earnest and ModernLend. These companies are able to provide loans and prepaid cards to a younger demographic by developing unique technology and taking into account factors other than credit history.
These companies understand that participating in the mainstream financial system at an early age is essential for an individual’s long-term financial stability.
The same Federal Reserve study, above, found that early entrants into the credit market are also more likely to be homeowners earlier in life and have better credit scores than late entrants – then wouldn’t it make sense for companies to establish trust with borrowers at an early age, making them loyal, long-term customers?