Tuesday, August 13, 2013

Are Young Borrowers Bad Borrowers?

The notion that young borrowers are bad borrowers is tested in a study by the Federal Reserve Bank of Richmond. Using data on young adults who obtained credit cards after passage of the 2009 Credit Card Accountability and Responsibility and Disclosure (CARD) Act, the researchers examined the default rates of those who made the effort to obtain credit cards early. The Act made it illegal to issue credit cards to people under age 21 unless they had a cosigner.

Those who self-select into getting credit cards before age 21 are (perhaps not surprisingly) less likely to default than older adults and those who enter the credit card market at an older age. Interestingly, the young adults who opted for an early credit card were also more likely to get a mortgage at a younger age. "The relation between mortgages and early credit card use indicates that young people may choose to enter the credit card market to build a strong credit history to later access homeownership," say the researchers. They conclude: "The results caution against interpreting early entry into the credit card market as a consequence of suboptimal or myopic behavior."

Source: Federal Reserve Bank of Richmond, Are Young Borrowers Bad Borrowers? Evidence from the Credit CARD Act of 2009

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