Millennials are constantly challenging traditional ways of life in every realm, from constant cell phone use to changing ideas about religion. According to a study from Bankrate.com, it seems they are also altering the norms of banking.
The study finds that 63 percent of adults aged 18 to 20 do not have credit cards, a major disparity from the 35 percent of adults over age 30 who do not use credit cards.
The youngest group, aged 18 to 21, has tougher rules when applying for credit cards, which is likely responsible for a decline in their credit card usage. Instead, Millennials tend to turn toward debit cards; a study from CreditCards.com finds that this age group “choose[s] debit cards to credit cards by a margin of two to one.”
In recent years, Americans have generally decreased their use of credit cards, so the decline for the younger generation may not be so surprising.
Perhaps the lack of credit cards may be good considering the unsavory practices of those who do use them. The Bankrate study finds that young adults are the age group most likely to miss payments, and that they often do not pay off the entire monthly balance.
While avoiding the traps of credit cards, which may lead to overspending or inability to pay back interest, may appear to be a smart move for now, Millennials may be headed for trouble in the long run.
A major draw to using credit cards is building a credit history. Making payments on time and not overspending can bolster users’ credit scores, which is crucial when making big investments later in life. Home loans are most notable in this case. Banks want assurance that their loans will be paid back, especially for high stakes home loans. They check this through history of past payment on borrowings, but for Millennials who have never made a payment on the credit card that they never had, there is no history. Although Millennials may be smart now, they are not building the credit that is essential to advancing later.
So while young people are trying to be financially responsible by cutting back on credit cards, they are actually doing themselves a lot of harm. This obvious flaw in the credit system might lead to change, however.
Bankrate’s Jeanine Skowronski says, "[A] widespread rejection of traditional credit sources, like cards, could force the bureaus and their lender patrons to look at alternative data for determining a customer's ability to repay.”
This statement is not unwarranted. In August, FICO, a reputable company for calculating credit scores, reported upcoming changes in the way it scores credit card users. In particular, they plan to address “thin-file” consumers who have limited credit histories.
While credit cards may seem dangerous to college students, building credit is a part of growing up, like moving out of the house or learning to drive. In order to be financially stable, Millennials must find ways to build credit and be more appealing to banks.