The Credit-Rating System Unfairly Scores Millennials: Report

A new VantageScore study argues a huge swath of millennials should have a higher credit score. Are you one of them?
A denied application

Add credit scoring to the list of institutions and practices—ranging from home ownership to marriage—that don't work for millennials. A new study from credit scoring company VantageScore argues the traditional method for assessing a consumer's credit-worthiness misses the mark with millennials without a robust credit history, leaving them without the means to finance important purchases such as homes, vehicles and more. "Many [credit scoring models] overly rely on credit behaviors such as depth and breadth of credit to assess the creditworthiness of consumers," said Barrett Burns, president and CEO of VantageScore. "This research suggests that such legacy thinking may not be serving the millennial population effectively."

Why size matters (when it comes to credit history)

To understand why traditional credit scoring models penalize consumers with thin credit histories, it helps to take a crash course in how companies such as FICO and VantageScore come up with your credit score. These companies collect data provided by the major credit bureaus (Experian, TransUnion and Equifax), which in turn receive data on consumers' financial history from lenders, such as banks and insurance companies.

For each consumer, both FICO and VantageScore weigh factors such as payment history, credit utilization, number of past credit applications and more to come up with a number that allows lenders (such as banks) to assess their risk of lending more credit to that consumer (the higher the score, the less of a risk you are). One factor the credit scoring companies consider important is the variety of credit types and how long you've had a credit account. Because in theory someone with several years worth of history with a credit card, a mortgage and an auto loan has demonstrated their ability to pay back lenders, that person will get a higher score than someone with just a credit card.

When history doesn't repeat itself

With previous generations, the logic underpinning this type of credit scoring proved more or less sound—consumers with thinner credit histories tended to have both less income and less equity in assets than those with fuller histories, making them more of a risk for lenders who want to make sure they eventually get their money back. Millennials, according to the VantageScore report, buck this trend.

VantageScore
Data from VantageScore

VantageScore believes the unprecedented burden of student loan debt shouldered by millennials makes them more guarded than other generations to open credit accounts, which can suck them further into debt. Whatever the reason, the data provided here shows that for millennials, a meager credit history doesn't mean a consumer lacks the financial means to settle up with lenders.

VantageScore naturally views this finding as compelling evidence that financial institutions and lenders should adopt their latest scoring methodology, which de-emphasizes the variety of credit type and length of credit history in favor of a consumer's more recent credit behavior. But since lenders will continue to use older models for the foreseeable future, anyone with a thin credit file should consider taking the following steps to build up their history:

Get authorized: If you want to build your credit history but worry about debt, one solution is to ask a trusted friend or relative with a credit card to make you an authorized user on his or her account. You'll get your own credit card linked to the account and your friend/relative makes all the payments, which still count toward your credit history. Just make sure this is someone who pays the bill promptly, otherwise your credit could be harmed by their late payments.

Feel secure: Those willing to accept a little risk of debt can get a secured credit card, which is a type of card where you have to deposit some money with the lender before you get access to the credit. The limits on secured cards tend to run low, but it's easy for even those with a bad credit score to acquire one and that low limit helps prevent you from getting in over your head in debt.

Pay on time: If you're one of the 44.7 million Americans with student loan debt, pay those bills on time. On-time payments factor more heavily into your credit score than the breadth and history of your credit, no matter what model lenders are using.

James Ellis

James Ellis is a Staff Writer for ValuePenguin, covering credit, banking, travel and other personal finance topics. He previously wrote for Newsweek, Men's Health, and other nationally-published magazines.

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