Younger People Use Less Debt, and It Could Be Hurting Their Credit

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The 20s are a time when people many begin their career, start their life independently, and begin planning for their financial future. Since many 20-somethings have recently finished college, it’s also time of repaying student loans, adjusting to a new home, and becoming accustomed to a budget, all while having a little fun in the process.

As many consumers come to find out, managing a budget involves much more than simply paying bills on time and saving a money in a bank account. Managing credit, retirement planning, building emergency savings, and maintaining good debt are also a few examples of things we must strive for in our efforts to plan financially.

These days, 20-somethings are less inclined to use credit cards and more likely to lean toward debit cards as their preferred method of payment. This can be problematic, as there is a thin line between good credit and not enough credit.

Bankrate recently published a report (which you can view here) on millennials (those ages 18 to 29) and their credit card usage. The report, which included a survey commissioned by Bankrate and compiled by Princeton Survey Research Associates International, found that nearly two-thirds of millennials (63 percent) don’t have a single credit card. Of those who have credit cards, 23 percent of them have one card, and a only 8 percent have more than one card.

The survey results found that adults over the age of 30 are in exactly the opposite position when compared to millennials — around two-thirds of this group (65 percent) have a credit card, and only one-third are without a credit card.

Why does this matter?

According to the report, those in the millennial age group carry an average credit score of only 628. This score places them in the low-average range. Sure, they may qualify for a credit card or auto loan with some lenders, and they may even qualify for a home loan, but at this credit score, rates will likely be really high. In some cases, a lender may even deny an applicant with this low of a score, especially if other measures of repayment ability, like income and debt-to-income, make the applicant appear to be a lending risk.

While in their 20s, a person generally doesn’t have a long length of employment, which lenders look at, as well. Using a credit card responsibly is one of the faster ways to build credit and show a lender trustworthiness. You have to start somewhere.

Why are 20-somethings shying away from credit cards?

Those in the 20-something age group steer clear of credit cards for a variety of reasons. Many of them saw the impact large debt had on consumers during the Great Recession, and they would rather avoid debt wherever possible. Others feel they simply don’t need a credit card, as their debit card suffices for online purchases and provides the same convenience that a credit card does.

“I don’t really feel like there’s a need for one in the way I live my life,” said Melissa Pileiro, a 24-year-old resident of Vineland, New Jersey, in the Bankrate report. “The idea with a credit card is you’re essentially putting money down that you don’t have.”

In addition to the overall cautionary sentiment about credit cards, the report also explains how the laws pertaining to credit cards have changed things a bit, as well. The Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) has made it more challenging for those younger than 21 to obtain a credit card.

Tips for improving credit

The Bankrate report’s author, Jeanine Skowronski, provides us with some helpful tips:

  • “Don’t think of the card as a debt instrument; think of it as a convenient way to transact. Go in with the mindset that anything you charge will be something that you can pay off at the end of the month. And, remember, you can pay your bill down as you charge via a linked debit account. This will help you stay within budget and mitigate the chances of being saddled with a bill at the end of the month you just can’t afford. You should also take advantage of any alerts your issuer provides. For instance, you can set up an alert that will let you know when your due date is approaching or you can receive a text whenever a large charge hits you bill. This is a great way to spot fraud, but also keeps you on top of what you are spending. Finally, educate yourself. Read up on smart spending behaviors, how credit scores work, how credit cards work, etc.”
  • Keep your credit card utilization low, ideally below 20 or 30 percent.
  • “Don’t max out your card! This goes back to keeping your credit utilization rate under 20% to 30% — that influences a significant chunk of your credit score. Also, don’t overcompensate for not having a credit card by opening up — or trying to open up — say, four at once. In the same respect, don’t go on a spree and open up every credit card offering a sign on bonus or retail store discount. Each application will generate a credit inquiry and those will ding your score, particularly if it’s fragile to begin with.”

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