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Are millennials unfairly denied credit thanks to traditional credit scores?

May 22, 2015
Young adults have a high incidence of being "credit invisible," meaning their credit histories render them "unscorable" based on the traditional credit scoring methods, a study released this month found.
The study, "Millennials: High Risk or Untapped Opportunity?" analyzed consumer behavior among three generations — millennial, generation X and baby boomer — and across multiple industries. Millennials, the study found, are denied credit at a much higher rate than the other two generations examined, but that an examination of alternative credit data would make them credit worthy.
Traditional credit scores, such as FICO credit scores, are calculated based on mortgage, credit card, auto loan and other installment loan payment histories. Data released by the Federal Reserve Board of New York shows that nearly 40 percent of people below the age of 30 years have a FICO score below 621, putting many of them in the subprime category, while others do not have credit scores at all.
But while traditional credit scores were valuable for previous generations, they may not provide the most accurate assessment of credit worthiness for the millennial demographic, the study suggests. This limited consideration hinders enterprises from understanding the true opportunity of millennial applicants and often results in credit declines or unattractive offers — higher interest rates, deposit requirements, limited features — that are rejected by the consumer.
The need for alternative credit data 
"Given the financial and credit behavior we’ve seen among the millennial population, lenders can no longer rely solely on traditional credit data and scores," said Patrick Reemts, vice president of credit risk solutions at ID Analytics. The company, a leader in consumer risk management, conducted the study.
"By leveraging alternative credit data — which utilizes proprietary alternative insights across multiple industries, plus address change histories — lenders are able to deliver a precise and unique view into a consumer’s credit risk and worthiness, which is particularly crucial for the millennial demographic," Reemts said.