Many US consumers are just getting started on their credit journey, according to a new study by TransUnion. The credit bureau’s recent survey “Empowering Credit Inclusion: A Deeper Perspective on New-to-Credit Consumers” shows that in the United States, 5.8 million consumers opened their first credit product and became new-to-credit (NTC) during 2021. And another 3 million became NTC through the first half of 2022.
While 46% of US consumers cited having a convenient means of spending as a top reason for opening their first traditional credit product, access to credit products goes beyond covering the occasional expense.
“A credit card is a unique product,” says Charlie Wise, co-author of the study and head of global research at TransUnion. “It offers lots of benefits, but the two primary ones are a means of transacting and the second is a means of borrowing.”
What is a “new-to-credit” consumer and what kinds of credit products are they using?
New-to-credit consumers are consumers who are just entering the credit market for the first time. According to the study, Gen Z made up the largest part of this NTC group (59%), followed by Millennials (21%), Gen X (12%), and Baby Boomers (7%).
For US consumers, the most common first product across the board was a credit card, and the primary reason for opening an account: new expenses cropping up. The second and third most popular first products were auto loans and private label cards.
Some consumers may opt to use their credit card for various transactions they might incur throughout their day-to-day spending, but others use it as a starting point for building a lengthy and positive credit history that future lenders will approve of.
These products may be easy to gain access to, but the spending power that these products afford new consumers tends to be on the lower end.
“If you have no track record, it's very unlikely the card issuer is gonna give you a $10,000 line,” says Wise. “In most cases you're gonna get $500–$1,000. As an unsecured line, they're gonna give you a relatively short leash on which to dispense until you prove your track record.”
Why access to credit is crucial
Many reported that other credit products, particularly mortgages, were considered inaccessible. Financing larger financial milestones like the purchase of a first home is still touted as a key driver in building long-term wealth. Without access to credit products, consumers who are not particularly wealthy may face an additional obstacle to hitting these goals.
“It's not surprising that mortgage lenders are typically conservative, it's highly unusual for them to make a mortgage available to somebody who has no credit history at all,” says Wise. “Many consumers, new-to-credit in particular, recognize that the path to homeownership and being able to borrow a mortgage to buy a home means that you have to build that track record, you have to start somewhere.”
A positive credit history and high credit score are often rewarded by lenders in the form of higher credit limits and loan amounts, more favorable repayment terms, and lower interest rates. But building this credit profile takes time and requires that you manage your credit responsibly by making on-time payments, avoiding applying for new credit too frequently in a short amount of time, and keeping your credit utilization low.
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“Over time, as consumers get older, their limits will increase. In some cases, the utilization increases, but in some cases, they're able to expand their limits to the point that they're able to keep their utilization rates relatively low,” says Wise. “As a rule of thumb, it's a good idea for consumers to keep the utilization rates below 30%. That's reflected as a positive on their credit scores. And if they can keep it even lower, even better.”
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What to know before opening a new credit product
Before considering a new credit product, it’s important to evaluate your current financial situation and determine if having access to new credit will help or hurt you in the long-run.
- Examine your budget. Before you apply for a new loan or credit card, it’s important to understand how the payments associated with that product will impact your budget and how much you can comfortably afford to repay each month. “Saying, ‘hey, I'll spend now and worry about it later’ is not a good strategy,” says Wise. As a NTC, you may be tempted to spend more than you can afford to pay off at the end of the month and end up in an unmanageable debt spiral. Having a plan in place before you spend any money can ensure that you don’t find yourself in a bind.
- Read the fine print on the credit product you’re considering. TransUnion’s study found that high interest rates were a top reason for rejecting credit card offers among consumers across all regions. While this may be a reason for rejecting an initial offer, it’s important to note that your credit card APR can change and NTC consumers should keep tabs on their interest rates when they first open a product and for as long as they hold that product. One recent Bankrate survey found that 43% of U.S. adults that carry balances on their credit card don’t know all of their interest rates. Take the time to understand the terms and conditions of the product you’re considering. Review the interest rate presented to you, possible fees and charges, and repayment timelines. Knowing these key stats will help you determine if this particular product is the best fit for you and your budget.
- Think long-term. If you’re not yet part of the credit market and on the fence about taking on a new loan or credit card—it’s important to keep in mind that, when managed responsibly, credit can help you gain access to a number of wealth-building opportunities. “We're not advocating that people open a credit card and start to carry significant balances on that,” says Wise. “But once you establish that track record, once you establish that longevity [it] is really going to serve you well to help you when you are ready to buy a home [and] to be able to take out loans that have favorable interest rates. For instance, consumers [who] are looking to start small businesses, in many cases, use personal credit and having that ability to borrow is really beneficial.”
