Explanations of the Millennial generation have passed the point
of cliché and descended into threadbare stereotype. We’ve all
heard the stories of the rising generation’s materialism, fickle
attitude toward responsibility
and robust sense of entitlement.
Aside from making good fodder for a Baby Boomer gripe-fest, this
way of seeing Millennials fails to explain the unique challenges
facing this generation.
Worse yet, resting on these
tropes makes us think of them as one-dimensional and keeps us
from seeing what’s really going on.
Within the Millennial generation,
a deep divide has emerged between those with prime credit scores
(a FICO score of over 700) and those with non-prime scores
(people with scores below 700, sometimes described as
By all indicators, the prime
Millennial is well-positioned to make financial progress: they
have reliable jobs, they are establishing families at a
comfortable pace, and they have access to the best financial
services and products.
On the other hand, the financial
prospects for non-prime Millennials face several headwinds that
make it difficult for them to see their way to the goals of
financial security. What’s more, the issues are largely out of
have notoriously low
. In fact, according to
a recent report
by the Federal Reserve Board, 46
percent of Americans cannot cover a $400 emergency with their
savings. Economists have tried to find the reason in our consumer
culture, corporatized retirement plans, or tax structure. On a
macro level, those all have a role to play. When we look at the
differences in savings rates among Millennials, we can see that
the issue does not affect all groups equally. For reasons that
might surprise you, non-prime Millennials are 58 percent less
likely than their prime counterparts to put aside money for
Scott Barbour / Stringer / Getty
This low savings rate spills over into the rest of non-prime
Millennials’ finances in dramatic ways. Thirteen percent of them
regularly overdraft their savings or checking accounts. Even more
shockingly, 41 percent of them say they run out of money every
other month or more often. Money managers have told us for years
that the key to long-term financial security is starting early
and being consistent in putting aside money. This simply is not
an easy task for the rising generation.
Why? Is it simply because they
don’t think long-term?
Personal Finance Management
Millennials are a confident
bunch. Nearly half of them still express confidence that they can
meet their long-term goals of being financially secure. They are
equally undaunted by the evolving requirements of the economy.
They believe they will have the skills needed for the jobs that
they will want in 10 years. This is hardly a group of people who
feel like they stand outside looking in.
In some ways, however, non-prime
Millennials think very differently from their prime
Non-prime Millennials are 45
percent less likely to maintain a monthly budget. This might
suggest that they are playing fast and loose with their personal
finances. Or, there may be another explanation for this lack of
One clue can be found in the fact
that 87 percent use their debit card to pay for day-to-day
expenses. Prime consumers lubricate their daily financial lives
with the use of credit cards. This allows them to spend what they
need without worrying if they have the money in the account to
cover the expense. This is not true of non-prime
Non-prime Millennials are cash
accountants. They largely don’t have access to credit, so they
live from one day to the next knowing exactly what’s in their
bank accounts. Day by day, they must track scheduled bills and
paydays to determine if bank account balances can cover the cost
of their groceries.
And indeed, the primary means in
which they’ve learned to manage their finances has been “trial
and error.” This may not be an efficient way of understanding the
nuances of our complicated financial system, but it generates
effective day-to-day strategies for getting by.
This day-to-day financial
existence makes more sense when you realize that 74 percent of
non-prime Millennials have jobs that pay an hourly rate, which
can impact income predictability, safety-net benefits, and
retirement funding. Also, they are the most likely generation to
have unstable employment situations. They change jobs or suffer
layoffs more often.
And then there’s the scourge of
the unexpected expense.
Non-prime Millennials are more
exposed to the challenges of covering an unexpected expense. They
are 55 percent less likely to feel confident that they could come
up with $1,200 to cover an unexpected bill. Only one-third of
them express any confidence at all; and, another third are “not
at all confident.”
Prime Millennials are most likely to say they would put that
expense on a credit card. Only 12 percent of non-prime
Millennials say they could turn to that option. Non-prime
Millennials are savvy enough to know that some of their best
options are “setting up a payment plan” or borrowing money from
family and friends, but all too often these options are not
available either. More than 1 in 10 fail to identify any way that
they could come up with $1,200 in an emergency.
Uncertain income and unexpected
expenses comprise the double whammy that makes it difficult for
non-prime Millennials to proactively manage their finances and
make financial progress. When your income is uncertain,
maintaining a monthly budget can be frustrating. Add unexpected
expenses and maintaining a monthly budget can seem futile.
What should be done?
Despite the commonly-held belief
that American Millennials have no one to blame but themselves for
any financial trouble they face, both data and anecdotal evidence
show that the truth—as usual—is more complicated than that.
Millennials have a lot going for them, not the least of which is
an optimism for the future. But, they also face an economic
environment different than previous generations. Instead of
relying on stereotypes to inform our opinions, we need to seek
understanding from data-fueled insights. Those insights can help
Millennials better track their own financial behavior as well as
help businesses better identify products and services to meet the
rising generation’s unique needs.
Banks and financial services
companies have to do a better job of understanding the unique
needs of the rising generation. Innovative solutions will only
come when companies anticipate customer behavior, challenges, and
attitudes. Exploring how those needs differ based on Millennials’
credit situation will be key to finding credit solutions that
solve those unique problems.
If you’re a Millennial who has a
non-prime credit score—or is at risk of losing your prime
status—it might be helpful to know that you aren’t alone. Many of
your fellow generationalists share your situation. Recognize that
unpredictable income and unexpected expenses can endanger your
finances more than others. Find ways to hedge against disaster by
saving money through temporary austerity, lining up informal
credit agreements with family or friends, and protecting what
credit you do have. Beyond that, do a little homework and learn
what you need to do to grow your credit score.
Jonathan Walker is the
Executive Director of Elevate’s Center for the New Middle Class.
The Center researches, advocates, and educates to promote open
dialogue about the challenges that face credit-constrained
Americans. The Center’s latest report is “The State of the