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Young adults might be trading one financial mistake for another

By , CardRatings contributor
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I think everyone agrees starting adult life with a boatload of credit card debt isn't the brightest idea. So, on the face of it, data published by FICO earlier this year seems like a good thing.

The credit scoring agency said in June that more Millennials are skipping credit cards and those with cards are carrying lower balances. That sounds like good news, but some young adults may be trading one financial mistake for another.

More Millennials going without credit cards

The FICO data not only found young adults between the ages of 18-29 are carrying less credit card debt, more of them are choosing not to open any credit card accounts at all. That follows a trend across all demographic groups but the increase in cardless individuals is most pronounced among Millennials.

Back in October 2005, approximately 9 percent of 18-29 year olds didn't have a credit card. By October 2013, that number had risen to almost 16 percent of young adults. Meanwhile, those that do carry credit card debt saw their average balance drop from $3,073 in 2007 to $2,087 in 2012.

The CARD Act of 2009 undoubtedly has something to do with the decline in the number of Millennials applying for credit cards. The law considerably restricts the ability of those younger than age 21 to open credit cards accounts.

However, coming of age during the height of the Great Recession might have something to do with it too. Writing for the FICO Banking Analytics Blog, Frederic Huynh speculates the recession may have put a damper on young adults' enthusiasm for credit. In addition, Millennials may be more in-tune with using debit cards and mobile payments, lessening their need to have a credit card in their wallet.

Are young adults making a mistake?

I doubt anyone would argue it is a bad thing for young adults to be a little wary about credit cards. And unless you are purposely financing a big purchase using low- or zero-percent APR credit cards, carrying a balance is virtually never a good idea.

But are young adults shooting themselves in the foot by avoiding credit cards completely?

Credit cards do more than give you rewards points and excellent fraud protection. They are also an essential part of building a solid credit history. Unfortunately, for many lending institutions, no credit is treated the same as having poor credit.

Young adults in college may not be thinking about their credit history, but in a few short years, those three numbers making up their FICO score may become very important. A solid credit score is key to getting the best interest rates for car loans, mortgages or other lending needs.

The best approach may be the middle ground. There is no reason to run out, get a credit card and go on a spending spree. At the same time, young adults would be wise to open a credit line, even with a secured credit card, to begin to build their credit history.

Millennials are smart to not be racking up significant credit card debt, and they should remember opening an account doesn't obligate them to carry a balance. To start on the path to a solid financial future, young adults should consider finding the best credit card for them and then paying off the balance each month if they make purchases.

Then, when they are older, they will have the credit score they need to qualify for the loans they want.

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