| January 15, 2016

Research of the Week: Credit and Debt by Generation

Millennials have highest credit card utilization, but the lowest student debt?

Each week, Consolidated Credit searches for financial research that can help you deal with your debt and budget. This week…

The interesting study

For the most part when it comes to credit and debt, you might be led to assume that both gradually increase over time as you get older. As you age and your income improves, you take on more debt and build better credit. Still, is that really the case?

The credit experts at Credit Sesame completed a new data study that looks at the credit score and situation with debt that their users face. This included analysis of almost one million Gen X and Millennial users each, as well as almost 250,000 Baby Boomers.

The big result

In most cases, the data shows what you’d expect – credit scores and debt levels both increase as we get older and have the means to take on more debt without struggling to keep up with the payments.

However, two points in the Millennials data definitely make us pause:

  1. Millennials have the highest credit card utilization ratios of the three generations. This is the amount of credit card debt you hold relative to the maximum total credit you have available.
  2. Oddly, Millennials have the lowest average student loan debt of any generation. While more Millennials hold student loans, the amount of debt is actually lower than Gen X or Boomers.

The fascinating details

Most of the data looks like you’d expect. So for average credit score (these use Experian Scoring)…

  • Millennials = 623.8
  • Gen X = 633.3
  • Baby Boomers = 674.6

Most measures of card debt also increase as we age…

  • Millennials have 3.6 cards on average, with an average limit of $11,237 and an average debt of $2,856
  • Generation X has 4.9 cards on average, with an average limit of $19,971 and a total average debt of $5,533
  • Baby Boomers have 6.1 cards with a total credit limit of $33,245, on average, and an average debt total of $7,266

But here’s where things get interesting. Although Gen X and Boomers have more average debt, they actually have lower credit utilization ratios than Millennials. Your credit utilization ratio is calculated by dividing the total debt you have by the total of all your credit limits.

Millennials have a 57.7 percent average utilization, which is higher than the 55.7 percent for Gen X and the 41.7 percent for Baby Boomers. In other words, Millennials use more of the credit they have available than the two generations ahead of them.

For student loan debt…

  • Millennials have 4.3 loans, on average, with a total debt of $23,506
  • Gen X also have 4.3 loans, on average, with a total debt of $32,518
  • Baby Boomer have the least average number of loans at 3.2, but the highest average balance at $32,601

What you can do

When it comes to credit card debt…

In all generations, the percentages for average credit utilization ratio are significantly higher than they really should be. In an ideal world you should really only utilize about 10 percent or less of your total available credit in order to avoid debt problems and maximize your credit score. Even Boomers at over 40 percent utilization are effectively carrying too much debt from month to month.

With that in mind, regardless of your age or generation, it’s a good idea to check your personal credit utilization ratio to see where you stand. You can calculate your ratio simply by totaling up both your balances and available credit lines. Credit monitoring services like Credit Sesame also show you these ratios at a glance so you can skip the math.

If your ratio is more than 10 percent, you need to develop a strategy to reduce credit card debt within your budget. This means prioritizing your cards by highest APR or lowest balance, then making the biggest payments you can on one debt at a time until each is eliminated. Ten percent is needed to support a good credit score, but you should really just take the extra step of eliminating your debt completely while you’re at it.

If you can’t reduce your debt quickly using traditional payment means, look into options for debt consolidation.

When it comes to student loan debt…

It might seem a little backwards for the oldest generation to have the highest student loan debt, but keep in mind that this includes loans taken out to pay for children’s education.

“We can conclude that Baby Boomers have such high debt for the following reasons – they are still paying off their own loans from higher education degrees, they took out parent loans to help their kids and even grandkids, and some may have just waited too long to start repaying their loans after they graduated from college,” says Claire Tak from Credit Sesame. “It’s important to note that since student loans can’t be claimed in bankruptcy, we can also assume Baby Boomers who are struggling financially can’t wash away their student debt via bankruptcy.”

So in reality, a Baby Boomer parent could still be paying for their education, plus paying for the education of children and even grandchildren. Federal PLUS loans can be taken out by parents to pay for a child’s or grandchild’s education if that grandchild was formally adopted by the grandparent. It still counts as student loan debt, which is how parents end up having higher balances according to the data because they are the holders of the actual debt taken out even though the kids receive the degree.

In any case, keep in mind that federal student loan debt – even if you’re a parent or grandparent holding PLUS loans – can often be consolidated using one of five programs available. When you consolidate your federal student loans, it rolls all of your balances into one simplified monthly payment that’s usually easier to manage on your budget. Both parents with PLUS loans and students holding other federal loans like Direct can use these kinds of consolidation programs.

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