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Study: Young Borrowers Do Not Equal Bad Borrowers

Christine DiGangi

While there are some scary statistics out there on college students’ spending habits and young people’s understanding of personal finance, the default rate is low among those who establish credit early on.

Researchers from the Federal Reserve of Richmond and Arizona State University issued a study on this topic recently, looking at whether young consumers are prone to making financial mistakes.

I remember one example my consumer education teacher favored, in which a college student picks up the pizza bill for a group of friends, flaunting a credit card. It ends up taking years to pay off the pizza he charged to a credit card, because he paid the minimum each month and racked up loads of debt. “That $15 pizza costs hundreds — yes, hundreds — of dollars in interest over several years,” he liked to say in a menacing tone, supposedly hoping we would make better choices.

There’s the argument that young people, in general, don’t have adequate financial literacy, the ability to pay credit card bills or a fully formed decision-making capacity. However, the report suggests that young borrowers learn more and earlier than their peers without credit do.

The CARD Act’s Impact

Looking at young consumers from before and after the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which regulated marketing and availability of credit to those younger than 21 years old, the researchers concluded that young credit card holders are the least likely to have serious delinquencies (more than 90 days past due) in their credit profiles. Though data of defaults among young borrowers is limited, the researchers also noted that young borrowers are more likely to have minor delinquencies (30 to 60 days past due).

The provisions in the CARD Act that impacted young consumers weren’t driven by high delinquency rates among that age group, says Gerri Detweiler, Credit.com’s director of consumer education. It was more about the marketing aimed at them and regulating it to make sure teens and students knew what they were getting into when they signed credit card agreements.

The study determined that those young consumers affected by the CARD Act were 8% less likely to have a credit card than those who were younger than 21 before the act took effect. Under the act, the under-21 crowd has to show proof of their ability to pay the bills, which makes that age group less of a credit risk.

While this young group of borrowers is a self-selected one, perhaps made up of more financially responsible people as a result, the researchers found no evidence that those who started using credit before age 21 experienced severe financial issues later in their 20s. On the contrary, they were more likely to build strong credit earlier and become homeowners sooner than those who had shorter credit histories.

Credit scores are made up of several components, one of which is credit history. (You can actually see a breakdown of your credit — in addition to your credit scores — for free, using a tool from Credit.com). A longer credit history is better, so while there’s more time to make mistakes by getting a credit card as a college freshman, there’s also more time to build good habits.

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