Millennials are missing out on the boom in cheap credit and using expensive payday loans because poor credit scores prevent them from accessing the best deals.
Borrowers born after 1982 generally pay a higher rate on loans and credit cards than those born before, according to analysis of more than 150,000 credit reports.
The study, undertaken by charity Toynbee Hall and employee loan company SalaryFinance and shared with the Guardian, found that young borrowers were twice as likely to have taken out high-cost payday loans than those of the baby boomer generation, and on average had used them twice as often.
The analysis found that millennials were much more likely to have bad credit than older people. This is partly because they have no payment history, but also because using payday loans lowers scores.
Carl Packman, director of research at Toynbee Hall, said young people struggled to access traditional finance that helps build their credit score.
“With few choices, and the pressures of low-wage jobs and increased insecurity, borrowing money out of necessity can only be done through alternative finance like payday lenders or friends and family. , and not everyone has the luxury of the latter,” he said. .
“Not only are the borrowing costs of a payday loan much more expensive than with traditional finance, but we can now demonstrate very strongly that it has a detrimental effect on people’s credit scores and therefore on their ability to accumulate this rating and access cheaper forms of finance in the future.
Loan and credit card providers have battled to dominate the best buys charts in recent years. Personal loan rates have fallen to record lows, with several banks now offering loans of up to £15,000 at an interest rate of just 3%.
Banks, meanwhile, have sought to entice credit card customers with increasingly longer interest-free periods. Virgin Money recently launched a credit card offering customers 30 months of interest-free spending.
Older borrowers can get these deals approved, but millennials pay more. The analysis showed that for unsecured loans up to £5,000 the average rate paid by adults born after 1982 was 18%, compared to 16% for those born between 1965 and 1981 and 15% for those born between 1946 and 1964.
Older baby boomers typically had four payday loans each, while millennials had more than seven.
Packman said: “I think for many young people the relative ease with which a payday loan can be obtained, compared to a small personal loan from a bank or an overdraft arrangement higher, outstripped the potential risk of falling into a debt cycle. This has contributed to both the attractiveness and standardization of the personal loan.
“Their lack of a financial history works against them and often the only answer left to them is to take out credit products like payday loans which, whether we like it or not, hurt credit scores and their ability to move up the credit ladder to more affordable forms of financing.
Andrew Hagger, a personal finance expert at the MoneyComms website, said lenders look at a range of factors when judging people’s creditworthiness, and many are opposed to young borrowers. “They might ask, for example, how long have you been in your job, which of course will count for millennials.”
Hagger said millennials are often caught in a “catch-22. If you can’t get financing, it’s hard to build a credit history.”
Asesh Sarkar, Managing Director of SalaryFinance, said: “As Millennials are expected to make up 50% of the global workforce by 2020, employers increasingly need to step up and support this group. of workers who are excluded from traditional finance.
“The government’s identification of the problems of roughly managerial (Jams) people, who have less than a month’s savings in the bank, supports our urgent calls for better financial support systems for working people. but who are in difficulty.