Youth vs seniors: Who maintains a better credit profile?

There are numerous factors which contribute to building a credit profile of individuals. These include payment of debt on time, credit utilisation ratio, level of debt diversification, and credit history. Although most of these factors are independent of each other but credit history is one thing which entails most of these constituents.

This is perhaps one reason for which younger folks have no or poor credit history, and as a result, they find it hard to get approval for a credit card. Conversely, mature professionals who have been earning for a long time have a greater likelihood of a better credit history because they have probably navigated the credit maze for a long time.

If we compare younger professionals with older ones, who would have a better credit profile? The answer probably lies in the key factors which constitute credit history.

Key factors comprising credit history

I. Credit behaviour: This is reflected by payment of bills on time, collections on loans, credit cards, and other debts.

II. Amount owed: This is the total debt in relation to the total credit limit.

III. Length of credit history: This is reflected by the age of your oldest account and the age of all accounts.

IV. New credit: This is reflected by the recent inquiries and new account openings, and the pace at which individuals has been applying for new credit.

V. Credit Mix: Finally, the credit history is also determined by the overall mix of credit, including secured (e.g., car loan) and unsecured credit (personal loan and credit card)

As we can see in the above list, the overall credit profile is built over time, and therefore, older individuals are likely to have a better credit history than their younger counterparts. The younger lot takes time before lenders start to trust them for credit.

At the outset, they can apply for a secured credit (e.g., a secured credit card or a loan against an FD) to build their credit history. And gradually they can start to borrow money. Later, their credit behaviour (whether they repay on time or not) gets added to the overall profile.

Meanwhile, it is important to mention that maintaining a strong credit history entails timely payments, low utilisation of credit limit, and avoiding unnecessary new credit. These habits tend to benefit all, regardless of their age or income level.

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