Just to be clear (because it might have been confusing above), everything works fine for GLOBAL libraries and credentials (both legacy and modern scm), but modern scm fails for FOLDER libraries and credentials. That failure (as mentioned earlier) occurs in the configuration page when the default version is resolved AND when trying to build a job.
The credentials are visible in the folder shared library configuration (for both legacy and modern SCM). In both tests, I selected those same credentials. It is a standard username/password pair which is scoped to that particular folder. We use those credentials for git checkouts for virtually every job in that folder (and in subfolders).
The username and password are ASCII only, although I think that the password contains a '!'.