The Generational Debt Gap

The last few years have been hard on everyone.  Retirement portfolios took a massive hit in 2008, millions of jobs were lost in the recession, and the economic recovery has been slow.  This sour economic environment has led been characterized by what economists term a “deleveraging.”

Deleveraging Process

A deleveraging process is a process where consumers deleverage, or pay off debts, in order to gain a more solid financial footing.  The last few years has served as a sort of wake-up call for many Americans, and it has reiterated the fact that we cannot live on credit forever and never pay the consequences.

Although the ratio of household debt to disposable personal income for Americans in general has fallen sharply during the recession of the last 3 years, the way that different generations approach debt and finances is markedly different.

Experian, one of the leading credit bureaus in the U.S., recently released a report that outlined the debt and credit disparities between generations.

In terms of credit scores, the Greatest Generation (Americans older than 65) have the highest average credit score, 820, while Generation Y (ages 19-29) has the lowest average credit score, which is 672.

The other two generations, the Baby Boomers (ages 47-65) and Generation X (ages 30-46), have average credit scores of 782 and 718, respectively.

Now, although Gen Y has the lowest credit score at the moment, it also has the lowest level of average debt at $34,765. Gen X carries an average of $111,121, while the Greatest Generation and Baby Boomers carry $38,043 and $101,951 respectively.

It seems that Generation Y is unwilling to accumulate significant debt, unlike the Baby Boomers and Gen X, which, until recently, have not been as concerned about debt.  Generation Y has likely seen the massive negative effects that overleveraging and high debt can cause.

Low Credit Scores

The low credit score of Gen Y is disturbing, but it is also closely tied to the high level of unemployment and underemployment that these millennial are facing.  A Pew Research Center study reported that 18-24 year olds are experiencing a 28.6% underemployment rate.

Underemployment generally means that someone is not making the amount of money they are worth and are working at a job for which they are overqualified.  Gen Y has taken out loans in expectation of high-paying jobs, and this underemployment is a major factor in why they have such low credit scores- as missed and late payments will knock down a credit score very quickly.

The Silver Lining

As the economic deleveraging continues, Baby Boomers are shoring up their personal balance sheets and are finding debt relief, which not only makes individuals more financially healthy, but it will have a wider effect in the American economy in the years to come. At the same time, Gen Y is seeing the very negative effects of overleveraging, and at the moment, Gen Y seems to not be following in the footsteps of the Baby Boomers and Gen X in debt accumulation.

If these lessons can be learned, then when the economy does pick back up and underemployment is no longer a major issue, Gen Y will have no trouble building up their credit scores again. Hopefully they will be better financial managers than the previous two American generations, which will undoubtedly lead to a stronger American economy in the future.