Who is Better at Managing Credit: Younger or Older People?

It seems like a solid hypothesis; those of you who are new to managing credit aren’t as good at it as someone who is older and has years or decades of experience paying their bills.

In fact, that theory was one of the reasons the CARD Act includes language making it illegal for credit card issuers to give a credit card to anyone under 21 unless they have a job or a co-signer.

But, is it actually true?  Are younger people really more risky to loan to than older people?

Is older better?

A new study published by the Federal Reserve Bank of Richmond and a Professor in the Finance Department at Arizona State University suggests that the “older is better” hypothesis is flat out incorrect.

The study finds that “an individual aged 40 to 44 is 12 percentage points more likely to experience a serious delinquency than an individual aged 19”, which suggests that restricting credit for someone under 21 isn’t as effective as perhaps restricting credit for someone who is between 40 and 44 years old.

Some of those who have been critical of the “under 21 rule” (including me) point out that forcing someone to wait until they’re 21 in order to open a credit card on their own puts them behind in the credit report and credit score building game.

In the pre-CARD Act days someone under 21 could get a credit card on their own and begin building a credit report and credit score such that when they graduated from college they already had solid credit experience, which is helpful when getting a job, getting an apartment, or getting a car loan.

The under 21 rule also suggests that we have an epiphany at 21 and can all of a sudden manage our credit responsibly.

According to the study, “Using data from the period prior to the (CARD) Act, we find that individuals under the age of 21 are substantially less likely to experience serious delinquency (90 days past due and longer)” and “…young borrowers are among the least likely to experience a serious credit card default.”

That means someone who opens a credit card at 18 is NOT riskier than someone who is older.

Getting into the game early
The study further suggests, “We find that individuals who would have chosen to enter the credit card market early in the absence of the (CARD) Act are less likely to experience serious delinquency or default than the individuals who enter the credit card market later.”

That proves the theory that getting into the credit market earlier does result in valuable experience managing credit, which pays off in the form of lower defaults.

The study continues, “We find that, conditional on the length of the credit history, individuals who enter the credit card market early have a lower probability of experiencing serious delinquency later in life.”

And the coup de grâce, “In summary, we find no compelling evidence that young borrowers are bad borrowers.”

And all of this means, “The results (of the study) caution against interpreting early entry into the credit card market as a consequence of suboptimal or myopic behavior.”

Young people who open credit cards are not irresponsible and voracious accumulators of debt.

Young people who open credit cards are not missing payments at an alarming rate. Young people who open credit cards are not doomed to a life of poor credit reports and poor credit scores.

The unfortunate take-away
The unfortunate take-away from this study is that the law is already the law, which means despite evidence to the contrary the “system” is still set up to prevent people under 21 from opening a credit card on their own without restrictions.

As of today you would have to convince your parent to so-sign for a credit card, which binds to two of you together permanently until the card is eventually closed.

This means if the balance is ever excessive or if the payments are ever missed you will not be able to get that information off of your credit reports.