Millennials – otherwise known as Gen Y – are borrowing more than they can afford. In our recent article looking at Gen Y being on borrowed time we examined the reasons why this may be the case. Now, we will look closer at Gen Y, and for those of you who fit into Gen Y – or are in a similar situation to those in this category – we will take a look at how you can manage your finances effectively now and in the coming years to ensure that you’ll be able to get access to credit when you need it.
Who is Gen Y?
Gen Y is the term used to describe those born from 1980 to 1995.
Here are some of the key stats about Gen Y, based on data from McCrindle:
- 1 in 3 Gen Y individuals have a University degree
- Gen Y makes up 34% of the Australian workforce
- Australia’s Gen Y population is approximately 5.22million, making up roughly 22% of the Australian population.
In addition to these figures, in early 2016 the Australian Bureau of Statistics stated that the average Gen Y household (i.e. a Gen Y couple living together) had an annual income of $113,152 and disposable income of $92,454.
What are the Characteristics of Gen Y?
Studies published towards the end of 2016 indicated that Gen Y is generally pessimistic about the prospect of ever being able to own their own home.
- 75% of Gen Y doesn’t believe they’ll be able to afford to own their own home in the next ten years – for Gen Y individuals already in their mid-30’s this means many don’t believe they will own a home by the time they’re 45!
- 2% of Gen Y already owns their own home
- 2% of Gen Y has no desire to ever own a home
These numbers reinforce the general feeling millennials can have that they aren’t – and never will be – as well off as their parents’ generation.
The same study found:
Similar studies conducted throughout 2016 have demonstrated that many Gen Y individuals hold a different set of ambitions to Gen X (born 1965 – 1980) or Baby Boomers (born 1945 – 1965). Where in the past owning your own home was seen as a key ‘rite of passage’ as well as a key component in attaining the Australian Dream, today Gen Y have a bigger focus on wanting to travel, while they also leave University holding much more in student debt than previous generations did. On top of this, today the average property price in Australia is equivalent to 13 times the average full-time salary, while for Gen X property prices were only 5 times the average salary.
Today, a Gen Y individual has on average $428,000 worth of debt, with over half of Gen Y admitting in an Experian survey that they take on debt in some cases knowing they’re not going to be able to repay it comfortably. It doesn’t have to be this way for millennials.
Here’s a look at some tips that will help millennials avoid common credit pitfalls and ensure that, even if they don’t wish to buy a house until they’re approaching 40, they are in a great position regarding their credit history when the time does come. The key, as is so often the case with finances and credit in particular, is to keep an eye on the future at all times.
Be Smart with What You Borrow
Let’s say you leave University with student debts of $20,000, you plan to work for a year or two and then go travelling before settling down back home in Australia and pursuing your career.
As a personal ambition, this is fine. The key is to manage what you borrow between leaving University and going on your trip. If you plan to travel but rack up credit card debts in your first couple of years of working, you’re not going to be able to take the trip because you will need an income to clear your debts.
Avoid Credit Cards Like the Plague
Credit cards are great if you get a promotional 0% interest deal, buy something big, and ensure you have cleared the balance in full by the time the deal expires. Likewise, if you use your credit card and pay the full balance off every month, this is fine.
The problem is that Gen Y tends not to do this, and instead racks up debt that sits on their credit cards, building up interest while they make the minimum payment and face spending years clearing their accounts. As well as costing you more money, trying to clear this revolving credit and being stuck in the debt cycle with no timeframe for becoming debt free can be hugely demoralizing.
Then, when the time comes to apply for a mortgage, your mortgage lender looks at your credit file and sees that you already have an immense exposure to debt, and declines your application or offers you a highly undesirable interest rate because you represent a higher risk.
Stop Applying for Credit
Experian’s 2016 research into Gen Y’s financial situation highlighted that Gen Y applies for personal loans and credit cards twice as often as Gen X and the Baby Boomers. Each time you apply for credit, this is logged on your credit file, and repeat applications for credit can have a huge negative affect on your credit score. When lenders look at your credit file in person they may interpret repeat applications as a desperation to acquire credit, and thus view you as a bigger risk.
Having several credit accounts open that you don’t use can also count against you, as despite not having a high debt level now a lender may worry that you can easily rack up debts and put yourself in difficulty.
Don’t Rely on Short Term Loans
Short term or payday loans can be ruinous for your credit file, as well as costing you a hell of a lot more than a regular personal loan. If you’re a Gen Y individual facing financial difficulties, a short term loan is not the answer.
Use Debt Consolidation for a Fresh Start
Using debt consolidation is one option you have to clear your existing debts and give yourself a platform for being able to buy a property or achieve your other ambitions in the future. By consolidating your credit card debts, in particular, you will escape the seemingly endless debt cycle that many in your generation are finding themselves in, and motivate yourself by having a date that you’ll be debt free, assuming you take on no further debt on top of your consolidation loan.
What’s more, consolidating your debts into one personal loan will likely reduce your overall repayment amount (bearing in mind how much interest would otherwise continue adding up on your credit cards!) and allow you to start putting money aside for savings towards a mortgage deposit or another large purchase.
Avoiding Debt and Looking to the Future
If you have left over student debts or other credit commitments, repaying your debts may well be a continuous factor in your life. However, it doesn’t have to be a defining factor. Avoid a financial time bomb hanging over you, don’t get into debt you cannot afford to comfortably repay, and whether or not home ownership is an ambition of yours you’ll face a much brighter and happier future.
If you are interested in consolidating your existing debts, you can get your interest rate before applying for a debt consolidation loan with NOW FINANCE.
Disclaimer: This article contains general comments and recommendations only. This article has been prepared without taking account of your objectives, financial situation or needs. Before taking any action you should consider the appropriateness of the comments made in the article, having regard to your objectives, financial situation and needs. If this article relates to the acquisition, or possible acquisition, of a particular credit product you should obtain and consider the relevant disclosure documents before applying for the product.