Everyone typically assumes that young adults are the least savvy with their finances. They have a lower income and have had less time to build wealth than their older counterparts, and often don’t have the same resources or experience with managing their money. Or so the critics have always said. Unfortunately, it may seem that not only are the critics right, but the problem of young people mismanaging their finances might be a bigger one than originally thought. Young adults are taking on credit card debt at a higher rate than ever before and paying it off at proportionally lower rates. Based on estimates, many will carry these balances their entire life and die in high debt. Here at NerdWallet, we are dedicated to helping people, especially young adults, become financially literate and independent. We recently interviewed Professor Lucia Dunn of The Ohio State University’s Economics Department to get the inside scoop on this troubling trend.
Dunn: Young adults likely to die in debt
Dunn has been working with consumer debt for quite some time. Dating back to 1996, she has been in charge of economic indicators in the Ohio Economic Survey, and since 2005 has been working with a national survey conducted at the Ohio State University Center for Human Resource Research that has recorded, among other things, credit card debt and payoff by age cohort. These surveys are similar to the Federal Reserve’s Survey of Consumer Finances, but are conducted every month rather than every 3 years. What she has found is that young adults, those between 18 and 30, are taking on high amounts of credit card debt and are not paying it off as fast as previous generations. The problem is significant enough that many young adults are projected to not be able to pay off the debt in their lifetime and ultimately die in bankruptcy.
There are a number of contributing factors to this issue. According to Dunn, many of young adult financial woes are “compounded by student loan debt.” It seems there are high pressures to enter the workforce with some level of higher education, and the influx demand for student loans has made them harder to get and harder to payoff after graduating from school. Dunn also notes that this generation has what she calls a “high time preference,” meaning that they prefer to consume sooner rather than later. Younger generations are culturally encouraged to spend when they are young rather than delaying gratification until they are more fiscally stable. Overall the number of credit cards issued and the number of people who carry balances on their lines of credit have decreased in the U.S. since the Recession in 2007, reducing credit card debt in general. This has not been the case for America’s young adults, however, who are still facing student loan debt and unemployment rates has high as 4 times the national average.
Why this is everyone’s problem
The repercussions of young adults being mired in credit card debt are not limited to just their age group. The presence of high debt is forcing American’s to marry and have children at a later and later age. Dunn notes that this may lead to a declining birth rate in the U.S. that could spell long-term issues for America’s economic health and growth. Since accessible credit is so strongly tied to an individual’s liquidity, this high credit card debt is also causing young adults to default on other things like car and mortgage payments. This in turn depresses the housing market and discourages banks from lending at a time when the economy is in need of liquidity for stimulus. Credit cards have become too precious of a resource to abandon. NerdWallet does not have the copyrights to use Professor Dunn’s publications, but for those interested her data and published conclusions can be found here.
One of Dunn’s related areas of research is on what she calls the Debt-Stress Index. Dunn and a team of researchers from the Ohio State University have found that debt-related stress had increased 55% from January 2006 to July 2009 in the wake of the great recession, leading to a variety of health issues and adverse social effects. Bank practices, economic progress, and the health of Americans are all being affected by this problem of high young adult credit card debt. Something needs to change in order to get America’s young adults back on track to healthy relationships with credit, and it can’t be left to just them to fix the issue. “Attitudes have changed,” says Dunn. “People aren’t scared of going into debt like they used to be.”