Young Cardholders Less Risky
Credit union industry executives agree with new research that suggests young adults carry less credit card risk than their elders.
Researchers found individual card holders between the ages of 40 and 44 are 12% more likely to go seriously delinquent on a credit card than a 19-year-old cardholder. The researchers defined serious delinquency as being more than 90 days late.
Researchers analyzed data from the New York Federal Reserve Bank’s Consumer Credit Panel and Equifax to conduct what they said is the first serious study of the relationship of age and card default.
While the data also showed young card account holders had higher rates of 30- to 60-day delinquency, the magnitude of the differences in minor delinquency was much smaller than those found with serious delinquency.
The study did not attribute the better card behavior among younger borrowers to the Credit Card Accountability and Responsibility Act. The CARD Act made opening a credit card account for someone under 21 years of age illegal, unless the young adult had a cosigning co-applicant or could otherwise prove they had a means of repaying debt incurred on the card.
“Using the passage of the Act to identify the selection effect we find that individuals who would have chosen to enter the credit card market early in the absence of the Act are less likely to experience serious delinquency or default than the individuals who enter the credit card market later,” the researchers wrote.
Additionally, researchers said young adults who responsibly manage revolving credit are more likely to become young homeowners.
“We interpret these results as indicating that some young individuals choose to enter the credit card market to establish a credit record and thus facilitate the transition to home ownership. Our findings contrast with the view that young individuals get credit cards early primarily as a response to aggressive advertising.”
Field data that could substantiate the research among credit unions has been hard to find. The two largest credit union payments processors, Card Services for Credit Unions and PSCU, aggregate data based on cardholder age.
However, credit union card industry executives said they were not surprised by the findings.
Ondine Irving, founder of Chicago-based Card Analysis Solutions, a noted analyst of credit union card programs, said she was not surprised by the finding, in part because she felt confident that while a young person might have taken out the card, it was the parents or guardians who served as backstop on the payments.
“I suspect the parents typically pay their children’s credit card balances,” Irving said. “From the research and documentaries I show in my classes, one of the reasons so many banks were enticing college kids with cards (was) they knew in most cases, the parents would pay the bill.”
But other executives reported their experiences indicated that young people who open credit card accounts do so to help manage cash flow and build a credit history.
Pete Piazza, vice president of lending for the 7,700-member, $80 million Indiana State University FCU, estimated that fewer than 100 of the credit union’s just over 1,000 credit card accounts were held by members under the age of 21. He said the credit union didn’t have any particular history of delinquency with that demographic.
“We’ve never had any particular problem with them, but especially not since the passage of the CARD Act,” Piazza said. But he also said his credit union didn’t keep any data on which cardholders moved on to take out other loans.
John Heimlich, marketing director for the 53,000-member, $487 million University of Kentucky Federal Credit Union reported that roughly 365 of the credit union’s more than 13,000 card accounts were held by cardholders of under 21 years of age. He said he could not track how many of them went on to take out other loans, but he suspected that most had the cards to build credit, because the average balance was $350.
He said that UKFCU used to include a low limit credit card in its student checking package, but the credit union ended the practice with the CARD Act.
The credit union remains open to credit union accounts for students under 21, but requires regular employment to qualify.
Macie Farmer, chief lending officer for the 1,347-member, $823,000 First Miami University Student Federal Credit Union, reported that fully half of the credit union’s almost 500 credit card accounts were held by students under 21 years of age. Most have a credit limit of $750.00 at an interest rate of 14.99%, until and unless they develop credit history and make a year’s worth of on-time payments. At that time, the credit union considers increasing the credit line and lowering the interest rate, she said.
Farmer said the program was considered an integral part of goals to increase financial literacy and improve credit ratings.