A report by the Australian Retail Credit Association’s (ARCA) consumer education site CreditSmart has revealed Aussie millennials have a low understanding of credit. Almost half are unsure of the difference between a credit score and a credit report and more than half do not understand what a lender looks for when granting credit.
The study revealed that only one in five millennials said they were confident about their understanding of what a credit score is, and a further 75 per cent were unaware that they can access their credit report for free.
Commenting on the findings, Geri Cremin, Credit Reporting Expert at the ARCA, said it was vital millennials became more aware of their creditworthiness.
“Millennials are at a point where they may be looking to make their first milestone purchase, like their first car or first home. It is really important for them to get on top of their credit health so when the time is right, they’re in a good position to make the big-ticket purchases.”
The research also flagged that nearly a quarter of millennials think their credit report can be checked when applying for a new job.
“There are restrictions on who can access your consumer credit report. Real estate agents and employers cannot check your consumer credit report,” explained Cremin.
An analysis* by credit score provider and ARCA member, creditsavvy.com.au, found that millennials (aged 25-34) have the lowest average credit score (624) when compared with GenX (aged 45-54) at 659 and Baby Boomers (55+) at the highest level (737).
“While younger generations generally have lower scores, this doesn’t necessarily mean they’re worse at managing credit. The lower scores are often the result of young people lacking a detailed history with credit or can be linked to the types of credit younger people take out like credit cards and personal loans,” said Leo Hillary, Product Director at CreditSavvy.
“The good news is that with comprehensive credit reporting, younger Australians will have more capacity to demonstrate their creditworthiness simply by making their loan repayments on time each month.”
A quarter of millennials have either checked their credit report or had it checked in the past twelve months largely due to credit card and mobile phone applications. Despite a low understanding of what is in a credit report, millennials are more likely to seek advice around debt and creditworthiness than their gen x or baby boomer counterparts.
Cremin suggests it is encouraging millennials want to improve their credit health. She suggests any millennial looking to improve their credit score should begin with the basics.
“You’ll start creating a credit history when you apply for a credit card, a post-paid phone or utility account (as long as it’s in your name). But it’s important to make sure you only take out credit that you can afford as not paying will have a lasting effect on your credit health,” she said.
Making sure you keep to payment schedules is vital to maintain good credit health.
“Even if it’s a small loan or small credit card, as long as you make repayments on time, you’ll start building a strong repayment history, which shows potential lenders that you can manage credit responsibly. That healthy credit history will be an asset when you want a larger loan, for example, a car or home loan, further down the track.
Cremin reminds millennials that a default remains on your report for five years and late payments can stay on your report for up to two years, The more you make late payments the lower your credit score will become. She suggests enlisting automatic payments as a great way to avoid missing a payment.
“Putting your repayments on auto-pilot might help when you’re away on holiday, or busy at work, and would otherwise forget to stay on top of repayments.
“If you’re struggling with repayments, talk to your credit provider about how they can help. The earlier you discuss financial difficulty, the better,” Cremin adds.
Australian is currently moving to more comprehensive credit reporting (CCR), which not only reports on defaults but highlights good behaviour as well.
By the end of September, many lenders including the Big Four Banks started sharing comprehensive credit reporting information to ensure a transparent, and fairer credit lending system.