Plastic-Shy Young in U.S. Spur Move to New Credit Data

The potential for a lost generation to the credit card industry is becoming apparent, by multiple measures.

From a Bloomberg article:

Thirty-nine percent of undergraduate students between the ages of 18 and 24 owned a credit card in 2012, down from 49 percent in 2010, a Sallie Mae and Ipsos Public Affairs survey found. And young adults who do have credit cards are carrying smaller balances: A median of $1,600 in 2010 compared with $2,500 in 2001 for under-35 households, according to Federal Reserve data.

The trend, rooted in stricter lending rules and weaker job outlooks for young Americans since the 2008-2009 recession, has implications for the strength of the economy. As people in Frohne’s age group eschew plastic, fewer are building the credit histories that would help them to gain financing for purchases of homes and cars that are critical to economic growth.

In part, the decline can be seen as an engineered consequence of the CARD Act, as credit card marketing must generally avoid consumers under age 21:

The decrease has been marked among consumers younger than 35, a Pew Research analysis released last month found. Credit card use for young people began declining prior to the recession, and between 2007 and 2010 dropped 20 percent, based on the Pew findings. The share of young American households carrying a credit card balance fell to 39 percent in 2010 from 48 percent in 2007.

That could be partly the result of a 2009 law, the Credit Card Accountability Responsibility and Disclosure Act, which made it more difficult for credit card companies to market and distribute cards on college campuses, said Brannan Johnston, vice president and managing director of credit bureau Experian Plc. (EXPN)’s RentBureau division.

As the article notes, with fewer credit trade line other than perhaps student loans, many young consumers fall into thin-file or no-file status, making future credit applications difficult to underwrite. Alternative data such as bill payment or rent payment data can provide additional data points, but coverage is often limited and scoring systems to use the data may be limited in scope and power.

It is also worth noting that today’s young consumers grew up in a fully developed debit environment, the first U.S. generation to do so. They have had access to electronic payments without the need for credit cards. The recession has reinforced their natural inclinations to “pay now.”

Will today’s young consumers rediscover credit cards as they mature into their family-building years, as did previous generations? They show no immediate signs of openness. Industry underwriting practices may need to evolve accordingly.

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