Millennials and Financial Optimism Bias

Young Americans struggle with low credit scores and information deficit.

When it comes to America’s youngest consumer segment, Millennials (19-34) may have significant hurdles to overcome when it comes to credit and debt – hurdles they may not really be seeing as they look forward.

 

A new report from the credit experts at Experian offers some insight into how Millennials feel about credit in general, and their own credit outlooks specifically. The results expose a lack of knowledge and a tendency to be overly optimistic about where they stand. This state may be contributing to the fact that Millennials have the lowest credit scores of all generations.

Optimism bias affects credit and debt perceptions

The data presented in the study shows Millennials could be suffering from an optimism bias where they believe things are better for themselves and their generation than what the facts actually show. As a result, Millennials believe their generation has an average VantageScore credit score of 645, when in fact the average is 625 – subprime by most standards.

They also think their generation’s average debt is significantly lower than what it really is – Millennials believe their generation has an average debt of $26,600. In reality, Millennials’ average debt is $52,200. So Millennials are undercutting average debt load by almost half. This excessive optimism about the situation with both debt and credit could be a recipe for financial heartache as Millennials grow in their financial lives.

“By overestimating credit score and underestimating debt load, Millennials could be setting themselves up for disappointment as they seek financing for major assets like new cars and even a first home,” says Gary Herman, President of Consolidated Credit. “Particularly when it comes to securing a first mortgage where debt-to-income ratio plays such a vital role in the approval process, Millennials may not be fully aware of how much work they need to do to get mortgage-ready.”

That concern is backed up by more results from the Experian study. While 71 percent of Millennials feel confident about their credit knowledge, one in three doesn’t even know their own credit score and 29 percent overestimate their scores. Two thirds (67 percent) don’t know how credit scores are calculated. It begs the question of exactly what that 71 percent think they know exactly

A pragmatic path to financial freedom

There is one statistic revealed in the survey that Herman doesn’t believe is overly optimistic – 83 percent of Millennials surveyed believe being debt-free is an attainable goal.

“Even with double the debt burden they believe they have, freedom from debt is attainable if you have a practical plan that works towards achieving that goal,” Herman encourages. “By creating a strategic plan to eliminate debt efficiently, headway can be made to achieve a debt-free lifestyle every month.”

Herman says the key is to make a strategy that works for your budget and one that uses every advantage at your disposal. So, for instance, instead of struggling to make five different monthly payments on five different federal student loans, Millennials should explore options that consolidate those loans into a single monthly payment that’s lower and easier to manage.

The same thing can be done for credit card debt. Using either do-it-yourself debt consolidation or getting assistance through credit counseling agency on a debt management program. Consolidation through a debt management program has been shown to reduce total monthly payments by up to 50 percent while allowing the borrower to pay back what they owe faster because it’s more efficient thanks to lower interest rates.

“The Experian report shows over one third (38 percent) of Millennials’ debt comes from credit cards and more than one third (36 percent) comes from student loans,” Herman explains. “By looking into repayment alternatives like credit card and student loan consolidation, Millennials can make meaningful progress on becoming debt-free faster than they may think.”

For more information on how to become debt-free, call Consolidated Credit today at to speak with a certified credit counselor at no charge.  You can also apply for a free debt and budget evaluation through our online application.