The Young Are Better with Credit

Many view young people 18 to 25 years old as high credit risks.
The Young Are Better with Credit

However, a working paper suggests that this group is less likely to default on credit card debt than middle-aged borrowers. In addition, the younger people are when they first use credit cards, the more likely they are to become homeowners at a young age and avoid credit problems later in life.

The paper was authored by Andra Ghent, assistant professor at the W.P. Carey School of Business at Arizona State University in Tempe, and Peter Debbaut and Marianna Kudlyak from the Federal Reserve Bank of Richmond, which has offices in Richmond, Virginia; Baltimore, Maryland; and Charlotte, North Carolina.

The researchers analyzed consumer data from the New York Federal Reserve Bank Consumer Credit Panel and Equifax to determine whether certain provisions in the U.S. Congress’ Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 made sense. The act made it illegal to issue credit cards to individuals younger than 21 without a co-signer or proof of ability to repay the debt. It also banned companies from recruiting new users within 1,000 feet of a college campus.

The researchers found that those in their early 20s are more likely to let their credit card payments go 30 to 60 days past due. However, this group is less likely to be delinquent for 90 days or more. In fact, 40- to 44-year-olds are 12 percent more likely to be delinquent for 90 days or more than 19-year-olds.

The CARD Act made it 18 percent less likely for those under 21 to obtain credit cards, which could make them less creditworthy when they’re older, says Ghent. Early credit card use, she adds, allows young people to know what it’s like to pay down their debt each month. In the process, they develop financial literacy, build credit histories, and more easily obtain mortgages later in life.

Young people “can’t learn by just watching credit card use,” says Ghent. “Letting students apply for credit cards may actually make sense.”

“Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009” is available at