Editors' pick: Originally published Sept. 9
The youngest U.S. adults have a better grasp of credit cards than just about any generation before them -- and they aren't about to repeat history withmistakes.
As credit agency Equifax discovered, about 70% of college students have one or more credit cards, but a slightly higher percentage pay their balances in full each month -- without help. In a survey of more than 600 college students ages 18 to 24, this happens despite 16% of respondents using credit cards for emergencies only. Nope, 72% pay off their credit card balances each month on their own, and 18% said their parents helped pay off their balances every month.
Even if they haven't paid their balances of within the month, more than half with outstanding balance (59%) plan to pay it off within a year. The days of free T-shirts, 29% interest and huge post-college credit card bills are over. Thanks, recession!
"We're talking about a generation that has subtle, but meaningful differences from its Millennial predecessors," says Melanie Wing, vice president of customer insights at Equifax. "We wanted to peer inside this consumer group, understand their relationship with credit, and attempt to prevent what we're seeing with Millennials - many of whom are plagued with record levels of student loan debt and an inability to successfully achieve their financial goals."
No kidding. By June, according to the Federal Reserve Bank of New York, total U.S. credit card debt hit $712 billion (up $28 billion from a year earlier). The Federal Reserve put total revolving debt at $960 billion.
At the same time, student loan debt reached a whopping $1.26 trillion (up $72 billion from a year earlier). That's the second largest pile of consumer debt behind mortgage debt (at $8.37 trillion, up $198 billion from 2015), and it hits Millennials disproportionately hard. As student loan and financial advice site Edvisors.com reminds us, just 20 years ago, average student loan debt was $12,759 and just 54% of all students graduated with debt. Last year year, the average student loan debt for a graduate who just received a bachelor's degree was $35,051. That debt was carried by 70.9% of all graduates.
That's tough enough to pay off with a job, never mind when you're unemployed right out of college. Though the Bureau of Labor Statistics puts the current unemployment rate at 4.9%, that jumps to 9% for people ages 20 to 24 -- or roughly the age of most recent college graduates. Only 70.7% of people that age are an active part of the workforce, compared to nearly 81% of those between 25 and 54. According to the FRBNY, more than one in ten (11.1%) student loans are past due. By comparison, the U.S. doesn't have that difficult a time paying its credit card bills, which are the second-most delinquent loans with 7.3% past due.
Yet the youngest Millennials get nothing but grief from many of Equifax's contemporaries. Understandably, according to a survey conducted by credit firm Experian earlier this year, 64% of Millennials (ages 19 to 34) consider credit cards dangerous. The survey also notes that, though 76% say they're knowledgeable about credit, 53% don't know their interest rate (12% on average), 32% don't know their spending limit ($5,000 on average), 29% have maxed out a credit card, 23% have had their credit card interest rate increased and 42% pay the minimum instead of the full balance?
"Many young adults are experiencing growing pains, but they can minimize the negative consequences by reading the fine print and accessing educational information and resources through the technology they are so well-versed in using such as mobile apps," says Rod Griffin, director of Public Education at Experian. "As Millennials gain more awareness about how to manage credit, they will feel more confident and therefore, hopefully make better decisions."
While Equifax notes that only 43% of young Millennials have checked their credit scores, it doesn't find the situation to be nearly as dire as its contemporaries do. Roughly 62% of those young Millennials know they could receive a free copy of their credit reports.
Yet, while Bankrate.com notes that just 52% of Americans have more emergency savings than credit card debt, Millennials are more likely than any other age group to have a nest egg that exceeds their bills.
"Contrary to society's perception of Millennials and their financial characteristics, Millennials have learned from their parents' mistakes and are more cautious when it comes to saving for that rainy day," said Greg McBride, Bankrate.com's chief financial analyst. "Their aversion to credit cards may have also played a part in helping them grow their savings accounts."
Also, though CreditCards.com found that more than one in five Americans with debt (21%) believe they will never pay them all off -- up from just 9% in 2013 -- only 11% of Millennials give the same response. Why? Because they know how credit and debt work and how to balance them. The percentage of U.S. households with credit cards carrying revolving debt has decreased from 44% in 2009 to just 34% today, according to the National Foundation For Credit Counseling, and Millennials are a big reason why.
Yes, 67% of Millennials hold a credit card, according to Experian, but 68% have pre-existing debt and 64% say finances are holding them back from their life goals. There are 49% who want to travel the world. Another 49% want to buy a home. There are 30% who want to start a business, 28% want to go back to school and 22% would like to change careers. It's why 71% have never maxed out a credit card, 77% have never had their credit card interest rate increased and 58% pay the full balance instead of the minimum each month.
Yeah, it turns out that young Millennials aren't as keen on worrying about debt and complaining about at is their predecessors were. When finance site NerdWallet compiled its American Household Credit Card Debt Statistics Study last year, it found that the average household is paying $6,274 in interest alone year. That means that 9% of average household income ($72,641) is being spent just on interest. Meanwhile, the average American household with credit card debt is facing 44 years of payments if they make only the minimum payment on their debt each month.
"This survey provided us with the feedback we had hoped: That this generation, despite being bombarded by information from a variety of sources, is developing credit-smart behavior early on," Wing added. "However, we firmly believe ongoing education; appropriate tools and resources; and a thorough understanding of the implications that today's financial decisions can have on tomorrow's milestones are keys to a positive experience with credit."
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.