Nov 08, 2016 Walt Wojciechowski
For lenders, millennials present both an opportunity and challenge. The opportunity lies in the generation's growing buying power. The challenge involves identifying Generation Y-ers who are financially responsible.
How do you assess a person's creditworthiness if they have a thin-file credit report or no credit report at all? To establish relationships with millennials, businesses will have to tap into alternative credit data to assess their ability to pay back loans.
20 percent of individuals aged 20 to 24 were credit invisible in 2015
Millennial characteristics: Credit skeptical
A significant portion of younger millennials, particularly those between the ages of 18 and 24, either have no traditional credit data or have not generated the amount of information credit bureaus require to develop scores.
A study from the Consumer Financial Protection Bureau found 20 percent of individuals aged 20 to 24 were credit invisible in 2015. Within that age bracket, around 16 percent of consumers were either stale unscored (meaning they didn't have recent credit data) or insufficient unscored (those lacking the appropriate amount of information).
Why are a significant portion of millennials credit invisible or underbanked? Credit card ownership and payment habits play a huge role in developing full-file credit reports, but many millennials don't use such financial products. Bankrate commissioned Princeton Survey Research Associates to ask more than 1,000 U.S. adults whether they used credit cards. About two thirds of study participants aged 18 to 29 said they did not. Many millennials view credit cards as risky, unnecessary financial burdens. Kristian Rivera, a 25-year-old from New York city, told the researchers why he didn't own any.
"Growing up I was warned of the risks of having a credit card and advised to put off getting one as long as possible," said Rivera.
"Creditors decline 67% of 23- to 27-year-olds at least once annually."
Using alternative data to connect with millennials
Still, millennials present a huge opportunity to businesses. First Data said that, by 2025, millennials will generate 46 percent of all U.S. income and control up to $7 trillion in liquid assets by 2020.
However, lenders aren't establishing relationships with millennials early on. ID Analytics discovered creditors decline 67 percent of 23- to 27-year-olds at least once annually. Lenders even deny 63 percent of those aged 28 to 32 for lines of credit or loans.
Given that many millennials are averse to traditional forms of credit, it's not surprising lenders aren't engaging them as customers. Business owners who recognize that traditional credit reports don't provide the insight they require often turn to alternative credit data. This information clarifies whether a consumer pays his or her rent, utilities and phone bills on time and in full.
There's been a lot of discussion regarding alternative credit lately. Many companies with no prior experience handling or weighing the value of alternative data are jumping on the proverbial bandwagon, pushing products to market in a mad rush to meet lenders' evolving needs.
Finding alternative data solutions backed by years of research and development means looking at company experience. Look for providers have worked with alternative credit data for at least 20 years. Such enterprises have spent the resources refining their algorithms and data collection methods, eliminating the risk of basing decisions on possibly inaccurate reports.