The effective management of personal finances owes much to experience, and building this experience means making mistakes along the way. For consumers, many of these mistakes are made young and rarely repeated, but it raises the question of whether young people should be judged on their past errors, particularly when it comes to credit scoring.
A recent survey from the Money Advice Service found that one in six young adults believe their debt has “spiralled out of control”. Many make mistakes in their younger years that continue to have an impact in the future, with 72 per cent admitting to regretting decisions made during their first years of financial independence.
But is it right to blame these same young adults for their financial naivety? In the UK, financial literacy is only coming into the National Curriculum this year, while in the US, 60 per cent of teachers don’t feel qualified to teach financial management. Many would suggest the schools as much as the home have a responsibility to educate on this topic.
After navigating secondary education, most young adults must then make one of their biggest decisions, and one which impacts hugely on finances. That is, whether or not to apply for university. While fees are free for German and Scottish nationals studying in their respective country, many applicants enter the workforce tens of thousands of pounds in debt, and do so today when demand for jobs outstrips supply. This is debt that will be owed for years, and although it doesn’t affect the debtor’s credit rating, failure to pay plus any accrued bad debt will.
It all adds up to a huge financial burden that many young adults carry into their careers, and one that causes issues even when lessons have been learned. Credit ratings take the long approach, focusing on past payment behaviour to make a judgement. Therefore, poor decisions in their youth could limit access to credit for individuals years later. Many would argue this isn’t fair, but it is a reality. For those facing the issue, it’s worthwhile not to shy away from credit, but use it to build their rating. This means responsible use of credit cards and ensuring late payment happens only occasionally, if at all.
For businesses considering offering credit, and particularly those with a younger customer base, it is up to them to decide credit risk and how much appetite for it they have. Obtaining a credit rating is the first of many vital steps to making this decision, and firms would be wise to consider the present as much as the past.
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