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Many Millennials Take a Pass on Credit

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UGGs

Among young consumers, credit cards may be going out of fashion as fast as UGGs, according to a recent FICO study. The number of millennials who don’t carry a credit card rose from 9 percent to 16 percent between October 2005 and October 2012. This trend has analysts wondering if the younger crowd is anti-debt, anti-bank or is just finding new ways to spend.

The skinny

While the recession seems to have taken a bite out of spending confidence across all age groups, the 18- to 29-year-old set showed the sharpest decline in credit card use, says FICO’s Frederic Huynh. The decrease may be partly because of the Fair and Accurate Credit Transactions Act of 2003, Huynh says, which allows the consumer to put the kibosh on predatory marketing. Also, it’s tougher to get approved for a credit card these days because of stricter lending guidelines. In fact, the Credit CARD Act of 2009 makes it illegal to issue a credit card to anyone under 21 unless he has a co-signer or writes a letter proving he has the means to make the payments. The CARD Act also restricts companies from making pre-screened credit card offers to anyone under 21, according to the FDIC.

Still, stricter lending isn’t the only reason for the decline in credit card use. There was an 11 percent decrease in the number of young consumers who had a credit inquiry on file between October 2007 and October 2012, according to Huynh, as posted in his blog comments, which means that many millennials aren’t even applying for credit cards. It may be that in addition to the pinch of the recession, this group is feeling decidedly anti-bank, or is just enjoying the new convenience of mobile banking. The good news here is that young consumers may be taking a more responsible attitude toward credit than their debt-carrying predecessors.

The flip side

The bad news: While millennials decreased their credit card debt by an average of $986 between 2007 and 2012, they also increased student loan debt by an average of $4,954 during those same years, according to the FICO study. College tuition, however, has not increased at the same rate, according to a study by Michael Greenstone and Adam Looney from the Hamilton Project at Brookings Institution. This means that students aren’t borrowing more money just to pay for higher tuition. In their blog post, Greenstone and Looney offer several suggestions as to why student loan debt has increased significantly. One possibility Greenstone and Looney don’t mention is that young spenders may be exchanging credit card debt for student loan debt, using loans to pay for items that, in the past, would have been purchased with a credit card. This becomes an issue when, instead of being paid off in the next billing cycle, the $30 sushi dinner, for example, collects interest for several years and costs the consumer far more money.

Another concern is that more millennials are using prepaid cards rather than debit or credit cards, according to a study by Javelin Strategy & Research. Unfortunately, many prepaid cards come with a host of hidden fees and little or no consumer protection, which makes them riskier and more expensive than their credit or debit card cousins.

The takeaway

While debt-free living is a noble endeavor, it’s important for millennials to keep in mind that credit cards do have their advantages, as long as the principal is paid off every month so that no interest is accrued. A few of these advantages include: establishing a good credit score, which is handy when applying for a home or auto loan, protection from fraud, identity theft, and lender failure, and having a safety net in case of an emergency.  It’s also important to do some research before deciding which card suits your needs and offers the best return on your investment. The credit card, like UGGs, may be going out of fashion with young consumers, but it still has its practical uses.

Uggs image via Shutterstock