Making a choice between whether to use credit or debit can be tricky. Sometimes, when you’re at the checkout counter, it can be hard to decide. A recent study by TD Bank found that more millennials are choosing cash and debit over credit cards. Roughly 54% of millennials are using debit cards or cash as their primary spending method. Furthermore, millennials tend to charge 22% less than the average consumer.
Millennials are becoming less willing to take on debt. This is likely because they got to witness the impact of the last recession firsthand. The message of frugal living has hit home with millennials, and they don’t want to suffer the consequences of making foolish money choices. The Cheat Sheet spoke with Julie Pukas, head of US Bankcard at TD Bank, to get more insight into why millennials are shying away from credit.
The Cheat Sheet: Why did TD Bank decide to do this study?
Julie Pukas: We knew that consumers were not maximizing their credit card usage to take advantage of rewards, and beyond that, many younger consumers are losing the opportunity to start out with a strong credit profile by avoiding credit altogether. Not having a credit profile can lead to higher interest charges on larger purchases down the road, like a home or a car, or can lead to an inability to secure financing at all.
We felt it was important to highlight that by using credit for the purchases, consumers can earn significant credit card rewards while also building their credit score. By surveying consumers and seeing where they were spending today it allowed us to understand the spending habits of various consumer segments and the types of rewards cards that would make sense for consumers. We learned that the millennial segment would benefit most from a rewards card that offers cash back on dining and fast food, since they’re consistently spending in those categories.
CS: Why do you think millennials are shying away from credit?
JP: The Index and other outside research has demonstrated millennials’ aversion toward credit. They’d prefer to use cash or debit for discretionary purchases and choose not to leverage a credit card as payment option. Many millennials witnessed firsthand the repercussions of the financial crisis — their parents lost jobs, homes, retirement savings, or had to enact an extreme change in lifestyle in order to stay financially afloat. Because of that, this consumer segment has focused on being responsible with money, spending within their means, and shunning items that need to be financed. The fallout from the crisis has led many millennials to have a negative view of credit and financing.
Further to that point, it’s very likely out of necessity that millennials maintain such a strict hold on their finances. For some, they’ve graduated from college with substantial student loan debt, they’re working in a low-paying job, or they’re unable to find steady, gainful employment altogether. A lack of capital has forced this group into a more frugal lifestyle compared to other generations and contributes to their desire to avoid credit.
CS: Whether using credit or debit, how can millennials keep a handle on spending?
JP: Due to the financial climate that many millennials faced upon graduating from college, they’ve had to be more fiscally conscious and fiscally responsible at a younger age than their older counterparts. Whether using debit or credit, it’s important that millennials set a budget and stick to it. We’ve seen from our survey that millennials are still enjoying eating out and going out for entertainment, but their overall spend is less than other generations, which is evidence that the majority of this group is living within or below their means.
Millennials should aim to keep credit card utilization at 30% or lower, and ensure that they are using credit responsibly in order to build a strong credit profile. When you factor in low salaries and the burden of student loan debt millennials aren’t necessarily set up for success, but by being budget conscious, prioritizing debt repayment and contributing to a retirement savings plan or 401(k) early on, they will be positioned strongly down the road.
Credit cards vs. debit cards and cash: How to choose
So when is it best to choose credit and when is it best to choose cash or debit? Luckily, TD Bank has answered that question for you in a handy little guide. Here’s their guide for what to choose:
Using credit makes sense when:
- You need purchase protection or an extended warranty on a big purchase. Some cards offer reimbursement on items that are defective, damaged, lost or stolen.
- Booking a hotel or filling up on gas, to avoid the temporary hold some venues put on debit cards, as to not tie up your available checking account balance.
- You can get a discount for opening a retail store card and further points/discounts if you shop there frequently.
- To keep from over-drafting, use credit for necessities between pay periods. But, budgeting is key — don’t spend beyond your means or rely too heavily on credit.
- You can reap rewards. We know that one in eight consumers are without a credit card with cash back rewards, yet on average spend $1,500/year on dining out. That’s $150 in missed rewards per year, that could pay for one month of gas or dining out.
Using debit/cash makes sense when:
- You’re making a purchase at a small retailer that doesn’t require a large sum of money/insurance, as processing credit card transactions are costly for small businesses.
- You’re trying to stick to your budget, as debit/cash only allows you to spend the dollars you currently have; especially with cash.
- If you’re a late bill payer. The last thing a young card user wants to do is establish a history of late payments. Until you’re able to manage your bills, stick to cash/debit.
Source: TD Bank
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