The Problem With Millennials And Debt…

Bankruptcies in Australia have risen at the fastest rate since the GFC and according to Experian, younger attitudes could be to blame. 

There’s been a 20% increase in Australians defaulting on their loans over the last 2 years, according to Experian.

The Australian credit bureau and data insights company reported this is the fastest rate since the Global Financial Crisis (GFC).

Experian’s latest research has suggested this worrying trend is being driven by the credit hungry attitudes of younger Australians.

“A desire to meet societal and social expectations”

Experian surveyed over 1,500 Australians including over 500 Baby Boomers (aged 55+), almost 600 Gen Xs (35-54 years old) and just over 400 Millennials (34 years and under).

Millennials were found to be around twice as likely as the average Gen X or Baby Boomer to believe they could not maintain their lifestyle without borrowing, or that without borrowing, they “would not have any quality of life” compared to the average Baby Boomer and Gen X.

More than half of Millennials admitted they would use credit even if they could not comfortably make the repayments.

David Grafton, Experian’s Managing Director of Credit Services and Decision Analytics, said Millennials are displaying a markedly different attitude to credit than the generations before them.

“One driver of this trend could be a desire to meet societal and social expectations, while trying to build wealth in a market of escalating house prices and stagnant income growth,” he said.

“In the last 12 months, Millennials have applied for more than twice as many credit cards, mortgages, and personal loans as the average Gen X or Baby Boomer – and not surprisingly, were also the most likely to be declined in their credit applications.”

This data seems to fly in the face of other studies by major banking institutions, which show that Gen Y and Millenials have the most savings of any generation in Australia.

Should lenders be more responsible?

Grafton said the findings raise an important question for lenders: Is this the new norm?

“If the next generation of borrowers are more risky, and more reliant on credit to achieve their lifestyle and home ownership goals, credit providers will need to find credit policies and procedures that strike the right balance between meeting demand and responsible lending practices.”

Danger signs

Over the past 12 months:

  • 22% of Millennials were unable to make a mortgage repayment, which is twice as many as the overall market average (11%).
  • 55% of Millennial mortgage holders had reduced spending on “essential items”, 38% worked additional hours or a second job, and 33% had borrowed from friends or family to ensure they could service their debts and commitments.
  • 21% of Millennials used one type of credit product to pay off another, which is three times more than the average Gen X or Baby boomer (6.5%).

Q&A with Suzanne Steele, Experian, Managing Director Australia/NZ

CANSTAR interviewed Suzanne Steel, Experian’s Managing Director in Australia and New Zealand, to find out more about this latest trend.

Q: Why do you think there’s been a sharp rise in the level of bankruptcies and defaults across Australia?

Through Experian’s Credit Bureau data, we’ve seen the level of bankruptcies, defaults, and court judgements across Australia rise at a rate not seen since the GFC.

In a market of escalating house prices and stagnant income growth, our research found a large number of Australians are experiencing challenges when it comes to servicing debt, and Millennials in particular are displaying a markedly different attitude to credit than older generations.

Some of the top findings also shed light on what could be behind some people’s financial stress, with 48% of Australians reporting they have less money to live on compared to this time last year. When you consider that Australians in the toughest financial situations are the ones most likely to turn to credit, these percentages are significant. That’s potentially 11 million Australians living on less than last year.

Q: Why do Millennials in particular appear to have a different attitude to credit than older generations?

On average, Millennials with a mortgage, credit card, or personal loan are $428,000 in debt. They owe $146,000 more to credit providers than the average Gen X and Baby Boomer.

One driver of this trend could be a desire to meet societal and social expectations while trying to build wealth in a market of escalating house prices and stagnant income growth.

Millennials are the portion of the community faced with the daunting task of buying their first home in today’s skyrocketing housing market, but they also have some unique traits that influence their attitudes to credit. The research found Millennials (17%) are around twice as likely as the average Gen X or Baby Boomer (10.5%) to rely on credit to “maintain their lifestyle”.

Millennial Debt

It remains unclear what impact the changing demographic mindset could have on the credit market in Australia, but what’s clear is the need for credit providers to remain focused on responsible, data-led decision making.

Q: How much responsibility should credit providers take for how their younger customers take on debt? Should there be more regulation?

There are 4.9 million Millennials in Australia, meaning they make up the biggest proportion of the Australia community ahead of Gen X and Baby Boomers. And most importantly for finance and credit providers in Australia, they represent the majority of your new customers right now and over the next decade.

If the next generation of borrowers are riskier, and more reliant on credit to achieve their lifestyle and home ownership goals, credit providers will need to find credit policies and procedures that strike the right balance between meeting demand and responsible lending practices.

Experian is a strong advocate for a transition to full adoption of comprehensive reporting in Australia, where all eligible credit providers are sharing positive consumer data, not just negative. Because it is a system that will provide more Australians with better credit opportunities and enable credit providers to make better lending decisions.

Positive data sharing is already gaining momentum in Australia, with participation levels consistent with the early levels Experian facilitated during the transition to voluntary positive reporting in the United Kingdom.

Find out what Millenials think of adopting comprehensive credit reporting here.

Q: What tips do you have for Millennials with regards to managing their finances?

Knowledge is power, so the best thing Millennials can do is go online and download their free Experian credit report.

Being aware of what your credit score is and the parts of your finances that impact the score is critical for Millennials. It enables you to know where you stand and address any issues before applying for a new credit card, loan or mortgage. If you make a credit application and are denied, that can further damage your score and push you further back – so it’s critical consumers get their free credit report so they make smart credit decisions.

Beyond that, my top tips include paying bills on time, doing due diligence before applying for credit, avoid multiple credit enquires in a short period of time, and steering away from high interest payday lenders that can lower your credit score.

Find out how to check your credit score here. Or find out more about payday lenders.

Q: The Productivity Commission recently recommended that consumers have access to data about themselves to help them choose the right products for them. What would this mean for credit shoppers and credit providers?

Credit providers are already well aware that having access to more detailed positive customer data will enable them to make better lending decisions, reducing the risk of supplying credit to people that are unable to repay the debt. It’s really in the best interests of credit providers to have a 360 degree understanding of a potential customer, including how much credit they currently have access to, as well as their repayment history.

For consumers, the change to positive data sharing will enable those with a strong credit history to access better deals and ensure others avoid getting into situations where they are unable to service their debts.

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