Gee, why could young consumers hate credit cards?
According to a recent survey by Experian, 64% of Millennials (ages 19 to 34) consider credit cards dangerous, even though 67% have at least one. Could it be because -- 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.”
If that seems a little oversimplified, it's because it is -- and not by a little. By the third quarter of 2015, according to the Federal Reserve Bank of New York, total U.S. credit card debt hit $714 billion (up $34 billion from a year earlier). The Federal Reserve put total revolving debt at $935.6 billion, in December, up 5.1% from a year earlier despite interest rates rising from an average 11.91% to 12.09% during that time. However, heaping the blame for that credit card debt on spendthrift Millennials ignores a few inconvenient realities.
At the same time credit card debt was hitting $714 billion, student loan debt reached a whopping $1.2 trillion (up $77 billion from a year earlier). That's the second largest pile of consumer debt behind mortgage debt (at $8.26 trillion, up $129 billion from 2014), 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, 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 swallow even when you have a way to pay it off. Though the Bureau of Labor Statistics puts the current unemployment rate at 4.9%, that jumps to 8.6% for people ages 20 to 24 -- or roughly the age of most recent college graduates. Only 63.5% of people that age are an active part of the workforce, compared to nearly 78% of folks between 25 and 54. According to the FRBNY, more than one in ten (11.3%) 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.
“Although we’ve seen an overall improvement in delinquency rates since the Great Recession, the increasing trend in student loan balances and delinquencies is concerning,” said Donghoon Lee, research officer at the New York Fed. “Student loan delinquencies and repayment problems appear to be reducing borrowers’ ability to form their own households.”
Yet, despite the fact that just 52% of Americans have more emergency savings than credit card debt -- according to Bankrate.com -- Millennials are more likely than any other age group to have a nest egg healthier than their monthly statement.
“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 credit-card- and student-loan-debt-ridden Millennials give the same response. Why? Because they're part of the solution, not the problem. 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% 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. It's funny how the other side of those statistics look, isn't it?
Why do they do this? Becuse they don't want to end up like the rest of you yutzes. Finance site NerdWallet compiled its American Household Credit Card Debt Statistics Study last year and found that the average household is paying $6,274 in interest alone year, which 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.
That makes the worst of the Millennials about as good with credit as any other generation. Another NerdWallet survey found that only 9% know that most consumers have more than three credit scores and 55% don’t know when they start being charged interest on credit card purchases. Sean McQuay, NerdWallet’s resident credit card expert and a former Visa strategy analyst, is regularly surprised when he hears that more half of Americans (54%) think carrying a credit card balance helps their credit score.
“Using your credit card, or another type of credit account, is important to build a solid credit score, but the only thing carrying a balance will do is cost you money,” he says. “Consumers who don’t pay their card off each month are charged interest on the average daily balance of said card. Sometimes interest charges are unavoidable, but you can’t pay for good credit via interest charges.”
Beyond that, nearly eight in ten Americans (78%) don’t know that closing an older, paid-off credit card hurts their score, only 8% of Americans know how paying a bill late affects their score and only 40% of Americans know that an annual fee is worth paying if the rewards earned exceed the cost of the fee. Considering that Millennials have a better grasp of even the most basic credit concepts than the general population thanks largely to their trial by fire following the financial crisis, maybe the rest of the nation's consumers can take a lesson from them instead.
“Three in ten Americans think that interest starts immediately after a purchase is made," McQuay says. "This could explain the aversion to credit cards so many consumers have. But you don’t start accruing interest until the day after your payment is due, and you won’t owe any interest if you pay off your entire bill by the due date each month.”
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.