Recent research by organizations ranging from the Federal Reserve to Facebook has suggested that millennials are strongly rejecting credit cards, with credit card ownership among young people at its lowest level in decades. The implication seems to be that millennials hate, fear or mistrust credit cards.
Some of this mistrust might even be valid. People do get themselves into trouble when they don’t know how to properly manage credit cards by making timely payments and keeping their balances low. But to truly drive their own financial independence, millennials may need to evolve their attitudes. Here, we explore recent findings on the millennial mindset, what may be driving their credit card behavior and how millennials can move forward to build credit and achieve financial success.
The Evidence That Millennials Reject Credit Cards
According to a 2016 analysis of Federal Reserve data by The New York Times, the percentage of American households run by adults under 35 that hold credit card debt is at its lowest level since 1989. Seven-of-10 millennials would prefer using a debit card to a credit card for everyday spending, says a recent survey by Chime.
And according to a 2016 Facebook survey and analysis of over 70 million Americans aged 21-34, 25% of millennials believe credit cards actually make their finances worse, with 30% stating they don’t see how credit cards can help them.
It’s important to note that the Federal Reserve report only looks at people who hold a balance on their credit cards, not people who pay off their balance in full each month. In other words, just because fewer millennials are carrying credit card debt does not necessarily mean they don’t have credit cards. Plus, trends have shown that, as they get older, millennials who avoid credit cards may come around to being cardholders in time.
Nevertheless, the prevailing research does suggest a mistrust of credit cards among young people.
So why is this happening?
Millennial Motivations for Dodging Credit Cards
There are a number of reasons millennials could be avoiding credit cards. Here are some examples.
Student debt has skyrocketed in recent decades, with the average American under 35 holding $17,200 in student loan debt, which could be discouraging millennials from opening a credit card and possibly taking on more debt. Another potential factor is the financial crisis of 2008, which has even caused older Americans to shed credit card debt.
These combined factors may be causing a collective fear of credit card debt. According to the Facebook survey, almost half of millennials prioritize saving and define financial success as being debt free. The fear of debt and desire to save combined could be a major contributing factor.
The Positives and Negatives of Being Credit Card-Averse
Eschewing credit cards does have a few short-term advantages. For one, it limits the ability to spend beyond one’s means. It also eliminates the potential for paying interest on everyday purchases. Finally, it can train young people to spend based on what’s in their pocket or bank account, not based on their credit limit.
But there are huge long-term downsides. Credit cards are often necessary for big-ticket purchases that drive efficiency and growth in a household — for example, a washing machine or personal computer. They also offer the next step in financial accountability, tasking consumers with managing debt responsibly.
Most importantly, consumers without credit cards can’t build their credit as quickly. Weak or nonexistent credit can lead to rejected loan applications or higher interest rates. Some employers and landlords even check credit scores. Credit cards are an essential part of achieving goals such as home ownership and financial success. Not having credit cards can actually cost you money.
Credit cards can even assist with smaller goals, such as taking a trip or earning cash back on purchases.
How Can Millennials Build Credit Without Driving Up Debt?
The importance of credit, and the role of credit cards in building that credit, is not lost on many young people. According to Facebook, 46% of millennials that do use credit cards say they do so primarily as a tool to build credit.
Credit card users can still avoid debt by using credit cards only for purchases they can afford, then paying off the balance in full each month. They can also use credit cards to their advantage by following these habits:
- Making payments on time
- Utilizing less than 30% of available credit limits
- Monitoring credit report
Responsible management of credit cards is possible, but can require discipline and practice. These efforts can pay off big for young people in the long run as they pursue their personal financial goals.
The right credit card for you depends on your financial needs, so if you’re considering a credit card, be sure to evaluate your options and choose the best card for your specific goals.