These days young people are building credit with auto loans
Posted on Wednesday, August 19, 2015 at 10:50:40 AM
Millennials are building credit differently than previous generations - through auto financing rather than credit cards.
An Experian study found that 14 percent of accounts recently opened by millennials are auto loans. Members of Generation X of a similar age in 1998 were taking out car loans at a much lower rate - a mere 1 percent of their recently opened accounts that year were auto loans. Meanwhile, most millennials aren't using credit cards to build credit. Only 27 percent of accounts recently opened by millennials were for bank? cards, compared with 46 percent for Generation X members when they were a similar age.
Christine Dikdan, assistant vice president of auto lending services at Home Loan Investment Bank, noted that auto loans are a great way for millennials to build credit, since auto financing is typically offered to them through first-time buyer programs. However, sometimes lenders will take steps to minimize risk involved with these programs, such as implementing high rates.
"Sometimes a more affordable way is to have a co-borrower for that first loan to strengthen the loan," she explained. "If this co-borrower lives in the same household, has good stable credit and income, rates are usually lower and insurance costs can also be less. As always, check all options before signing on that dotted line."
She went on to note that if millennial borrowers do take a loan out on their own, they should be careful to not seek more auto financing than they can afford.
"If they were lucky enough to get approved on their own, the best thing they can do is to make sure they are not biting off more than they can chew," she explained. "Situations can change on a dime. It is very important when you first start out with credit that it is handled responsibly. I still recommend a credit card history, but don't go crazy with it. It is very easy for revolving credit to get out of hand quickly."
Dikdan's statement that situations quickly change is especially relevant considering how long most auto loan terms are these days. Anything can happen over the course of 60 or more months. She had advice for millennials on how to make sure they stay on top of payments through the life of longer loans.
"Budget," she said. "Stick to it. Sometimes you can't always have that new pair of shoes when you want them."