How Not Driving Can Hurt Millennials’ Credit Scores
Kali Geldis hasn’t had a car since college, when she drove a car her parents paid for. After graduation, she moved to New York City, where owning a car would just be an additional — and unnecessary — expense. She’s part of a larger trend among young people who are not driving, or when they do, are driving less. As a result they may be missing out on an opportunity to help build strong credit scores.
The Federal Highway Administration found, for example, that the percentage of 14- to 34-year-olds without a driver’s license increased from 21 percent to 26 percent from 2000 to 2010. And other research from the University of Michigan Transportation Research Institute reported that about 87% of 19-year-olds had their licenses in 1983, but 25 years later, only 75% did. The number of 18-year-olds with licenses fell from 80 percent in 1983 to 65 percent in 2008.
Whether that’s because they, like Kali, live in cities where driving is probably more of a hassle than it’s worth; they can’t afford the expenses of a car on top of student loan payments and rent; or they simply don’t see a need to drive because friends or family will help them out when they need it; it’s probably safe to say that those without a driver’s license don’t have a car loan.
A car loan paid on time can be an important credit reference for someone who is just starting out. “Your (credit score) might take a short-term hit when you get a car loan because you acquired more debt, but after you’ve made a few payments it would help, and starts to improve very quickly,” explains Barrett Burns, President and CEO of VantageScore Solutions. “It helps because it’s another way of demonstrating a positive payment pattern.”
Credit Scores in the Long Run
When young drivers do try to finance a car they may face hurdles, and one of them is the lack of an established credit history. “Eighteen- to 24-year-olds typically do not yet face many of the financial responsibilities that characterize adulthood. This group…is less likely to have ever applied for auto loans (15% vs. 79%) compared with consumers aged 25 and over,” notes Javelin Strategy & Research in a recent report, “Evaluating the Viability of Alternative Decisioning Tools: A Study of Auto and Credit Card Lending Markets.”
The report also found that these young people were more likely to find the application process for credit cards or auto loans to be more difficult, and were more than five times as many were denied auto loans compared with consumers aged 25 and older.
Of course, that does not mean someone can’t build credit without financing a vehicle. Just as an auto loan can help build credit, “so would a credit card or a student loan if they are paying those on time,” says Burns. It is helpful, however, to have a credit report that lists a mix of different types of credit references, such as credit cards, a car loan, a student loan or a personal loan, for example.
As Credit.com’s Editorial Director, Kali knows the importance of a good credit scores. “I’ve got an ‘A’ for payment history and debt” she says, when describing her credit rating on Credit.com’s free Credit Report Card. “But a ‘C’ for age of credit history and mix of credit.” With her student loans paid off, her only current credit references are her credit cards.
Building for the Future
Some 16% of Millenials don’t have a single credit card, and that can be a mistake when it comes to building credit.
The Javelin survey also revealed that nearly half (47%) of 18- to 24-year-olds have never seen their credit score (compared with 13% of those aged 25 and over), and the reason they most often cite for not checking it is that they have little or no credit history.
Kali says she’s thankful she didn’t have the burden of a car loan payment when she graduated from college. “It was definitely easier not to have a car loan that I had to worry about,” she says. She knows that someday that may change, and she may want to finance a car or home. But for now, like many of her generation, she’s in no rush.