FICO Research: Does Student Loan Debt Impact Millennial Homeownership?
In April, we highlighted some of the positive behaviors that people with student loans are exhibiting to help improve their FICO® Scores. Following National Homeownership Month, w…
In April, we highlighted some of the positive behaviors that people with student loans are exhibiting to help improve their FICO® Scores. Following National Homeownership Month, we examined whether student loan debt appears to impact decisions about when to begin another important step in their financial and credit journey: purchasing a home.
Using a nationally representative sample of FICO scorable consumers as of October 2017, we compared homeownership rates (using presence of an open mortgage loan as a proxy) across Millennial consumers age 25 to 34. Within this population, we distinguished rates of homeownership between those with no student loans on their credit file, those with closed student loans, and those consumers with one or more student loans actively in repayment.
Key Findings: Consumers with closed student loans are more likely to begin their homeownership journey
We found that the 11% of consumers with closed student loans are almost two-thirds more likely to have an open mortgage compared to the 50% without any student loan history on their credit file. The gap is even more pronounced between those with only closed student loans on file and the 39% of the population with active student loan debt. Notably, the active student loan debt population is half as likely to have an open mortgage. A possible explanation for this result is young consumers’ concern about outspending their income by simultaneously servicing both student loan and mortgage debt. Young consumers continuing to pay down their student loans may be less inclined to open a mortgage until they sufficiently increase their income or rid themselves of their student loan burden.Some of the above difference between these three groups can also be attributed to differences in their credit risk profiles. The average FICO® Score of each group correlates with the rate of home ownership: those Millennial consumers with only closed student loans on file, score on average some 40 points higher, than those with no student loans on file. Those with active student loan debt score slightly lower than those with no student loans on file.
In an effort to control for the effect that these different risk profiles could be having on our analysis, we examined the same chart as above, but for those age 25-34 consumers scoring in the narrow FICO® Score range of 660-679.
While the contrast in home ownership fades when focusing on a specific 20-point score range, we still observe that the 8% of consumers with closed student loans are nearly 50% more likely to have a mortgage than the 41% carrying a student loan balance.
Shifting our focus to a population with higher FICO® Scores of 740+ results in higher overall home ownership rates across all subgroups, as shown in the figure below. In addition, the percentage of this population with closed student loans more than doubles (to 17%) relative to the 660-679 segment. But the difference in mortgage activity between the three subgroups remains relatively similar to the 660-679 band: those with closed student loans are considerably more likely to have begun their homeownership journey than those with no student loans or those still paying off debts incurred from financing their education.
This analysis presents evidence that while demographics, housing preferences, and other economic conditions play a role in the direction of Millennial homeownership according to Freddie Mac, student loan debt is also a factor in driving Millennials to delay home ownership. Bridging the journey from one stage in the credit life cycle (repayment of student loans) to another (taking out a mortgage), we will present FICO research on the credit behaviors that homeowners exhibit, which drives their FICO® Scores upward.
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FICO® Score High Achievers: Is Age the Only Factor?
<p>FICO’s latest research on <a href="http://www.fico.com/en/blogs/risk-compliance/us-credit-quality-rising-the-beat-goes-on/" target="_blank">national FICO® Score distribution</a> shows that US credit quality continues to trend upwards, with an increasing number of consumers scoring in the highest scores ranges. Given that, we decided it was time to refresh our study on “<a href="http://www.fico.com/en/blogs/risk-compliance/infographic-what-does-a-high-credit-scorer-look-like/" target="_blank">FICO® Score high achievers</a>,” where we examine the credit behavioural profiles of consumers with higher credit scores.</p> <p>As expected, our latest study showed that older people generally have higher scores, as has been the case in our <a href="http://www.fico.com/en/blogs/risk-compliance/age-before-beauty-credit-worthiness-before-youth/" target="_blank">past research</a>. This is largely because they have trade lines that have been open longer, which leads to higher scores (assuming the trade lines are in good standing and all other things equal). The most credit savvy among you will remember that length of credit history accounts for roughly 15% of the overall <a href="http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx" target="_blank">FICO® Score calculation</a>.</p> <p>But for younger consumers, it isn’t too helpful to say, “just wait until you are 50 years old, and that will fix things!” Thus, I decided to dive deeper with our analysis, including looking at the credit behavioural characteristics of younger consumers with high FICO® Scores.</p> <p>In this analysis, I looked at credit characteristics for the two highest score bands, 750-799 and 800-850, which have about 16% and 23% of the population, respectively. I further broke this down by looking at the characteristics of the youngest 15% in each group, which occurs at age 29 for the 750-799 group and 43 for the 800-850. We used FICO<strong>®</strong> Score 9 for our analysis, and examined typical variables of the categories that go into the make-up of the score.</p> <p><a href="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png"><img class="alignnone size-full wp-image-29367" src="http://www.fico.com/en/blogs/wp-content/uploads/2016/10/FICO-Score-High-Achiever-table.png" alt="fico-score-high-achiever-table" width="715" height="747" /></a></p> <p>Since there’s a lot to dissect in this chart, I’ll highlight a few findings that struck me: <ul> <li><strong>Credit history.</strong> Higher scores are undoubtedly associated with a longer time on file. What’s striking is the higher average time on file for the 800+ group, both overall and for revolving accounts (the most common trade line). Clearly, it helps to start credit use early in life – but that’s not the sole determining factor for high scoring. The younger cohorts in both the 800+ and 750-799 groups have time on file medians significantly less than their older counterparts.</li> <li><strong>New credit.</strong> High credit scorers do, in fact, pursue new credit. We see little variation in months since last trade line opening and last inquiry among all groups observed.</li> <li><strong>Pay on time.</strong> As you might expect, the further in the past the delinquency, the higher the score – and that’s <u>if</u> a delinquency ever happened. 95% of the 800+ people and 72% of the 750-799 group have never been delinquent, which is a striking contrast to the 57% for the total population. The percentages for the younger groups are even higher, especially so for the 750-799ers. Collection items are also scarce for these high scorers. While 23% of the national population have collection items greater than $99, the figures are only 0.5% for the 800+ group and 3% for the 750-799 group. It is clear that, in conjunction with starting a credit file early, paying on time is a key trait of the FICO® Score high achiever.</li> <li><strong>Balance and utilization.</strong> Finally, we look at how credit is being used, focusing on revolving product use. (Since most people only have one mortgage or one auto loan, variation in instalment product figures is minimal and driven by payment history, which is near perfect for high scorers, as we’ve seen.) FICO® Score high achievers tend to have more open revolving accounts. While the % active trades and utilization are generally lower, by no means do high scorers avoid the use of credit products. What drives the difference here is the amount of <u>available</u> revolving credit utilized. The 800+ group is roughly 1/4 of the national median, both in total and on their highest utilized card; they also have lower balances and more cards<em>. </em>The 750-799 group is more active and higher utilized, but still only at 2/3 of the national figures. The young 750-799 group compensate with lower revolving balances and, as a result, lower utilization, which is in line with what we see for the 800+ group.</li> <li><strong>Benchmarks.</strong> I’d like to point out that while this study provides good benchmarks of the typical credit traits of the FICO® Score high achiever, individual credit profiles will vary widely. And keep in mind that when we sort groups of consumers as a whole by different behaviours, some results may look superficially odd. For example, the 800+ band has a longer median average open account time (128 months) than average revolving months on file (140 months).</li> </ul> So, what do we conclude? A huge takeaway is that high scorers don’t have too much in the way of serious delinquencies and negative public record data.</p> <p>In most respects, the young 800+ people are like their peer group. They really only differ markedly in their shorter credit history and higher non-mortgage balance, both of which are a function of life stage. Our results show that you don’t have to be a credit product hermit; these high scorers have more credit cards. The takeaway is to start credit activity early and maintain well-managed and moderate usage.</p> <p>In many ways, the young 750-799 people are more interesting because their age profile is much younger. Their credit characteristics differ more from their peer group, particularly in terms of length of credit history. They compensate by having almost pristine credit records and lower balances.</p> <p>Ultimately, 39% of US consumers are FICO® Score high achievers, which they accomplish by following common-sense credit practices. It ain’t rocket science!</p>
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