Consumer Credit: Privilege Or Entitlement?

There isn’t much that can be said about the “average” American credit user in 2017 because, as it turns out, there really isn’t one. According to market research provider Gallup’s latest poll, the average American has at least one credit card and about $15,000 in credit card debt, NerdWallet reported.

The problem with those averages is that they are, well, averages. The average U.S. man is 69 inches tall, weighs 197 pounds and has a 40-inch waist, but there are also plenty of American men who do not fit that description.

So, when one really digs deeper down into the credit data stack, the problem with averages is readily apparent, as Unifund president of capital formation Stephen Dessner and chief strategy officer Michael Schwartz told PYMNTS’ Karen Webster in a recent interview. The reality is that how old one is, when one started using credit, how one learned to use credit and the specifics of one’s financial situation are revealing factors when it comes to a customer and his or her relationship with credit.

And looking at three specific groups — millennials, Gen Xers and those under financial stress — it’s easy to get an idea of how the credit market is reshaping itself and, perhaps, how it will need to continue to reshape itself going forward.

“There is overlap, of course,” Dessner said. “There are plenty of millennials under financial stress, but specific groups do have a tendency to show similar attitudes and behaviors around credit.”

What are those attitudes?

Millennials: Generation Student Debt

Student debt is everyone’s favorite terrifyingly high number to throw around when it comes to the millennial generation, and reports have said they owe $1 trillion. Alone, that is pretty terrifying. After all, anything trailed by 12 zeros is unsettling on its face and bewildering when applied to anything that isn’t the debt of a nation state.

But, according to Dessner, that number probably isn’t scary enough yet, because, well, it’s too low.

“There is an equal if not greater amount of student receivables, separate from the debt issued by entities like Sallie Mae,” Dessner said. “We’re talking about things like user fees, room and board costs and other related obligations that are on the balance sheets of colleges and universities where these individuals [were and] are enrolled. The situation is larger and more intense in terms of obligations because it is only part of the picture.”

As a sub-vertical, recent millennial grads are holding something probably closer to $2 trillion in debt, Dessner estimated, adding, “That’s what you need to see to get a fuller picture of what they are dealing with on graduation.”

The number is rough, particularly when paired with the massive shift in underwriting attitudes within the last 20 years or so, Schwartz noted.

“When I was in college, it was ‘sign up for a card, get a free t-shirt’ — literally anyone could get one,” said Schwartz. “I still have a massive collection I am using to wash my car. But that was pre-CFPB, and these days, a lot of students are graduating from college with no cards and only a lot of student debt represented in the credit profile.”

In some ways, that represents some sensibleness on behalf of millennials, many of whom are so chock-full of student loans they aren’t interested in taking on additional credit. They know they have no room for it. But, Schwartz noted, millennials are also often unable to find credit, or at least unable to find truly useful credit, as they are often hit with very high APRs or very low-balance cards.

Moreover, according to Schwartz, when one looks at some of the outcomes for their older siblings, it might be for the best that at least some credit is out of recent millennial grads’ reach.

Gen X: A Bridge Between Eras Of Credit Use

“Life is one continuous ATM machine,” Dessner jokingly said of Generation X’s use of credit, noting it was much more liberal than that of their parents or younger, struggling siblings.

“Thirty years ago, if you didn’t pay the butcher there were social consequences,” Dessner said. “Credit cards disintermediate [that], and make skipping out on a bill a much less personal experience. Consumers are much more likely to shrug off a credit card payment they didn’t make.”

Plus, Schwartz added, Generation X was born at a unique point in history. As the older offspring of the preternaturally profitable baby boomers, they learned a lot about lifestyle from their parents and grew up as credit cards were becoming a common form of currency.

Additionally, Generation X was the last generation of college students to get all those free credit card t-shirts, as card companies very actively courted them. The problem, Schwartz noted, is though millennials get a lot of press for being the first generation to do “worse” than their parents, Generation Xers were the first to know they weren’t going to outdo them.

Dessner also pointed out people don’t want to change their lifestyles, and some of the utilization of credit is sociological. He noted he was brought up to think about cards as charge cards to be paid off every month. Unfortunately, Dessner said, most Gen Xers don’t tend to think of cards this way, instead using them to support a lifestyle — which can sometimes mean making ends meet — with the idea they will pay the balance off when they can.

“Credit is seen as an entitlement,” Dessner told Webster. “And, therefore, the behaviors that are derivative of a sense of entitlement come along with that usage. It’s very hard to change that dynamic.”

The Distressed Borrower: What’s Next

“So, I have a story,” Schwartz told Webster. He qualified the story as one he got third-hand and, as such, can’t directly authenticate. But, if true, it is a remarkable example of how consumers think about credit.

As the story goes, a very high-end department store with a well-known general policy of taking anything and everything back had a customer who bought an expensive purse using a store card. She did not make a single payment on that card, and the account went into collection. The store collections department offered her a deal: Just return the purse and they’d close out the account with interest fees and late fees all forgiven. The customer, it was reported, proceeded to go on a 10-minute tirade about why she wouldn’t dream of doing that because it was her purse and she had paid for it.

The point, Schwartz noted, is that true or not, people tend to get strange ideas and have some disconnected thinking when it comes to paying with plastic.

It’s that potential “disconnect” that — in a world where payments are becoming more invisible by the day, and as easy as it is to click without keeping count of what one is purchasing — makes end-of-the-month sticker shock a real risk.

“The internet of commerce is about immediate gratification, frictionless, and then, at the end of the month, there is a reckoning,” Dessner noted. “But it is a time-release reckoning, divorced from the purchase. You ‘can kick’ it down the road a little, but then you have to figure out how to kick it down the road a bit further.”

But ‘can kicking’ can become a flash point when a stressor happens, such as when a job is lost or a serious illness shows up, and kicking the can becomes impossible.

Even then, Dessner said, consumer attitudes about declaring bankruptcy — particularly among those who already have bad credit — are different than they were a generation ago, when such a thing was social death.

Is it fixable? According to Dessner, it depends on how stressed, maxed out or thin-filed one is, and the options are tough.

There are a variety of high-cost credit products and alternative players like the marketplace lenders, but, Schwartz noted, in some ways there are more questions than answers for consumers in that space. Questions like why more mainstream players aren’t getting into certain areas like personal loans, for example.

“There are a lot of players out there who, if they wanted to go into personal loans in a big way, they would put all of these alt lenders out of business because their cost of capital is just so much lower,” Schwartz said. “The big question is whether they are being risk-averse bankers and leaving money on the table, or do they see something we all don’t see. I’m not sure, but I do know there are a lot of traditional lenders out there who could be originating personal loans at significant volumes and aren’t.”

But there are players doing interesting things in the space, he added.

“There is a whole new wave of underwriting,” Schwartz said, “… not basing lending decisions solely on traditional bureau data and FICO scores, but instead using other tools to go after underserved markets. There are a handful of startups that focus on [the] thin-file, new, first-job, or immigrant consumer that are looking at frequency of direct deposits or academic performance, for example, as a predictor [of] how you will position in the market and how well you will do. These lenders see a market need and are trying to serve this consumer.”

The credit markets are changing, and in some ways for the better. Millennials are apparently a bit more financially responsible than their older siblings in Generation X. But the challenge — the what’s next — for underwriting will come in building the next generation of products in credit. Those products likely won’t be one-size-fits all, but may instead be a better fit for the borrowers who use them.