A new generation must learn responsible credit habits

Richard Barrington
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Richard Barrington
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A new generation must learn responsible credit habits
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Millennials have arrived as leaders in the consumer finance space. They are no longer new entrants just happy to be there. Increasingly, they are the mainstream.

Along with their expanded use of financial products, millennials need to develop financial habits that will make their experiences with those products successful. So far, it appears millennials’ use of credit has gotten ahead of their developing successful credit habits.

There’s no doubt that as they gain experience with using credit, millennials will improve their financial habits. However, the longer this takes, the more costly the learning process will be.

Millennials flex their financial muscles

A recent report on the credit industry gave some clear examples of how millennial consumers are moving into the mainstream of the financial services market:

  • According to a report from TransUnion, last year the total credit card balances of millennials passed that of baby boomers for the first time. Millennials now trail only Generation X as credit card borrowers.
  • Millennials moved into the lead in terms of opening new credit card accounts, a sign that their usage of credit will continue to grow.

To some extent, these trends are good for millennials. As they represent a growing share of the credit market, they will increasingly help define that market. As time goes on, more and more product features and delivery formats are being geared to the preferences of millennials.

Young adults struggle more with credit than other generations

Of course, there’s also a down side to those statistics on millennial credit use. Credit card balances represent debt, and that’s something young adults often find hard to manage.

According to the Federal Reserve Bank of New York, while young adults have less credit card debt than any other age group, they have the highest percentage of accounts that are becoming seriously delinquent. That means their credit card payments are more likely to become 90 days or more late than any other age group.

Beyond credit cards, young adults also have a bigger problem with late payments for debt overall. Notably, these statistics are from last year – before the impact of resuming student loan payments had fully sunk in.

This problem is not only worse for young adults than for other age groups, but it’s also trending in the wrong direction. The payment delinquency rate for young adults has more than doubled in just the past two years. The resumption of student loan payments could accelerate this trend.

In short, while millennials may be growing into the role of major credit users, so far the experience has been a rocky one.

Why this matters

To some extent, over the years every generation has gone through this. They start using credit and have to learn by experience how to handle it. The problem is, experience can be an expensive teacher.

Missing payments and running up debt too fast when you’re young can have a lasting impact on your ability to build wealth and on your future access to credit.

People with lower credit scores also usually pay higher interest rates. A recent CardRatings.com study of credit card rates found that on average, credit card rates offered to people with low credit scores were 6.82% higher than those offered to people with high credit scores.

On a $5,000 credit card balance, this means having a lower credit score could cost you an additional $341 a year in interest charges.

Worse, if your debt burden causes you to start missing payments, not only would you face late fees on top of those interest charges, but you may also find your ability to get credit in the future severely restricted.

A recent Federal Reserve survey found that bank loan officers were tightening lending standards on credit cards and loan products. This means people with poor credit will have a harder time getting approved for credit cards and loans. When they do get approved, they are likely to face higher costs and lower credit limits.

Thus, some simple mistakes with a credit card when you’re young can hold you back when making more important financial decisions in the future, such as buying a car or a home.

With leadership comes responsibility

What are some of the habits young adults need to develop to show they’ve truly arrived as successful users of credit?

Here are some suggestions:

  • Find a system that helps you make each monthly payment on time. Automated payments are one possibility, though these aren’t always ideal for credit cards because the amount of the payments varies. Look at your statements to learn the due date cycles of your credit card payments, set yourself reminders on your phone or other devices. Or if you do set up automated payment, make sure you’re paying your bill in full each time, if possible. Making a credit card payment twice a month is another good option.
  • Pay more than the minimum amount whenever possible. One thing that sucks people into building up credit card debt is that most cards only require a relatively small monthly payment. Credit card companies do that to stretch your debt over a longer time so you pay more interest. Making larger payments keeps your balance down so you pay less interest.
  • Don’t let your debt outlive your purchases. It’s one thing to borrow for an item that you are going to be able to use for a long time to come. However, borrowing for a night out if it’s going to take you months to pay off that debt sets you up for a fast-growing debt burden.
  • Choose the right form of debt. Credit card debt is generally more expensive than other forms of borrowing. That means it’s best used when you can pay it off each month to avoid interest charges. If you need to borrow for a longer-term purchase, look into a lower-interest loan or a 0% intro APR credit card.
  • Smart shopping starts with your credit choices. You shop around for the best prices online, so why not also shop for the best rate on the credit cards you’ll use to make those purchases? The CardRatings.com rate survey found a difference of 13.5% between the highest and lowest credit card rate being offered, so a little comparison shopping could save you a lot.

Getting access to credit is part of coming of age in America. Like coming of age though, getting access to credit is just a start. It’s what you do with it that really matters.

Richard Barrington
Cardratings Contributor

Richard has over 30 years of experience in financial services, including 23 years with the investment management firm Manning & Napier Advisors, Inc., where he led the Marketing Group and served on the firm’s Investment Policy Group and Executive Group. Over the years, Barrington has...Read more

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