Millennials don’t always understand credit, but that might not be so bad.
According to data from Experian, the under-35 set has a pretty ragged understanding when it comes to issues of debt and financial literacy. At first blush, the numbers are startling. A third of millennials don’t know their own credit limit, and more than half hold credit cards without knowing the interest rate.
Elsewhere, refinancing firm Lendedu has found that only 8% of students even know the interest rate on their student loans, the single most important financial decision most young people will make.
Sandra Bernardo, manager of consumer education for Experian, found the data particularly surprising in light of how accessible information is to the younger generation.
“Millennials have so much access to information and education through technology, through apps, through blogs, compared to any other generation,” she said. “However they didn’t seem to have the knowledge that they probably should.”
“I would guess that they’re just not accessing [information] as much, or perhaps it’s not as much of an interest to pursue more education on the topic,” she added.
There’s a lot that they’re missing out on. Experian’s study covered a wide range of ignorance, and it’s not just about the details. In addition to gaps about their own finances, young people also lack basic knowledge about how credit products work. Revelations from Experian’s study included:
- That 43% of Millennials don’t know how to break down annual percentage rates to monthly credit card payments,
- That 38% of them don’t know the penalties for late payments, and
- That 30% don’t know their card’s policy on grace periods for late payment.
That last is particularly harmful for a generation that is already mired in debt.
The issue is one of financial literacy, and often young people who receive financial products without anyone to explain the intricacies of what they’re signing up for. By the time they’ve run up a little bit of debt and missed that first payment it’s too late to go back and learn what “introductory APR” means. The damage is done.
Part of the problem is, simply, that personal finance has become an incredibly complicated subject. And part of the problem isn’t really a problem at all.
“Many individuals, not just Millennials, don’t understand credit scores and don’t know about credit reports and how that all works,” said Bernardo. “That can be a little complicated, and maybe it just takes some experiences and learning how to navigate the system of credit.”
At the same time, however, this may all be a tempest in a teapot. For all of the stories out there highlighting Millennials’ lack of knowledge about their own finances, experts say that they may also be showing a brand of pragmatism. Depending on how someone uses his or her credit much of this information may simply not be relevant.
In other words, maybe that 25-year-old doesn’t know his credit limit, because he’s irresponsible. On the other hand, it may also be because he has no intention of ever reaching it.
“There’s really no such thing as average,” said Nan Morrison, CEO of the Council for Economic Education. “I don’t know what the interest rate on my own credit card is, because I pay my bills every month.”
“I think the bigger problem is not that they don’t know the interest rate, but that they don’t understand if they only pay off $200 on that $1,000 bill every month that will compound,” she added.
For many experts on financial literacy, the source and motives behind ignorance is what really matters. Despite headline-grabbing numbers, they say, young people only get into trouble when they actually start making decisions based on bad information. Someone who doesn’t know the intricacies of his own credit card might be at risk or might simply be a user who pays his bill off every month.
For others, the issue is less pressing because they simply have no choice. While issues such as Millennial ignorance on their own student debt make for prominent news, it’s common for young people to approach the subject fatalistically.
Why worry about the debt when you have no choice?
“People need to look at holistic decisions, not at little points of data,” Morrison said. “There aren’t little rules of thumb that everyone should follow.”
This is not to say that there aren’t concerns about Millennial ignorance. Complicated finance has simply become a part of life in the 21st Century, and Millennials can no more plead off learning the terms of a credit report than a Baby Boomer can announce that she’s “just not a computer person.” The world has shifted, and these days much of what happens inside a spreadsheet can affect your real life.
Credit scores, in particular, Bernardo said are a huge source of concern.
“[Millennials] don’t check their credit report very often,” she said. “Some don’t feel it’s necessary, and that’s troubling.”
Millennials need to know how the financial system works. Not understanding it, or ignoring it, can lead to huge problems, such as missing a false flag on a credit history.
That said, there’s a difference between understanding the system and knowing a handful of facts, and it’s important to take data like this in context. For many Millennials, learning irrelevant information just isn’t that important, whether it’s because they pay the credit card off every month or can barely make the minimum payment without running late on the rent (which is itself another issue altogether).
It’s true that there’s much the young don’t know about credit, but this is a situation that calls for context, not a crisis.