Young consumers with short credit histories rise to higher tiers faster than similar older borrowers, while also showing a tendency of remaining loyal to the same lenders in the future, a new study finds.
Research looking at
"Many financial institutions are hesitant to extend loans to borrowers with thinner credit files and lower credit scores, who are often millennials and Gen Zers," said Kevin Filan, senior vice president of marketing at Open Lending, in a press release. "However, this strategic consumer segment shows immense potential for upward credit mobility compared to their older counterparts."
The study examined the histories of over 4 million younger consumers, including new-to-credit borrowers with files of two lines or fewer and their more established peers in the same age groups. At least one trade line needed to be an automotive loan.
The research determined that approximately 40% of thin-file Gen Z and millennial borrowers returned to the same type of bank or credit union they used to take out a car loan for future borrowing.
Also, within a two-year period from June 2021 to June 2023, credit scores of the returning Gen Z and millennial borrowers rose from a Vantagescore average of 653 to 666. By comparison, credit-thin borrowers from older cohorts saw their average inch downward from 656 to 653 during the same two years.
"The financial institutions that intelligently address these 'emerging prime' borrowers through comprehensive data analysis and decisioning can generate higher-yielding loan opportunities and long-term customer loyalty," Filan said.
While Gen Z and millennials are more likely to have thinner credit histories to begin with, 22% graduated to become "established" consumers compared to 14% of Generation X and older borrowers over the two years. At the same time, the study also found a larger 30% share of the younger segment moved into a higher credit-tier status versus 22% of older borrowers.
The average length of time it took a credit-thin customer to become an established borrower with three or more lines on their report was 2.62 years for Gen Z and millennials, but 3.71 years for similar Gen X or older consumers.
Younger consumers still building their credit histories are also likely to add loans at a faster pace, regardless of what the subsequent lending product might be. On average across all likely liens, 2.1 years passed between first and second loans for Gen Z and millennials compared to 3.1 for Gen X and older borrowers. If the new product was a mortgage, the length of time to open the new loan was 2.3 years for the younger cohort compared to 2.7 for older counterparts.
Among the credit lines on established files of younger consumers, 7% included a mortgage. The most common type of loans on file were automotive and credit or other bank cards, which both appeared on 90% of reports.
For banks and other home finance businesses, the study shows the promise presented by early marketing to Gen Z and younger millennials, even if a mortgage might not be among their short-term goals. Several studies over the past few years have consistently shown Gen Z
More recently, Servicelink found
Although new to the market, Gen Z also appears to
"The data from the study shows how thin-file consumers are capable of growing into healthy, prime borrowers once provided access to the essential milestone of an affordable automotive loan," noted Satyan Merchant, senior vice president, automotive and mortgage business leader at Transunion, in a press release.
"We believe that the financial institutions that set these deserving borrowers on the path to financial wellness will be rewarded with long-term loyalty through subsequent credit products," Merchant added.
