The Young and the Cardless Are Decreasing Debt

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Since the recession began in December 2007, the number of young Americans that live without credit cards has doubled. After watching older generations, including their parents, get hit hard by the recession and a burden of debt, many young consumers are opting for debit cards instead. According to data compiled by credit score provider FICO from the credit files of millions of consumers, approximately 16 percent of Americans between the ages of 18 and 29 did not have a single credit card by the end of 2012, an increase from the 8 percent recorded in 2007.

Thanks to this changing view of financial responsibility, credit card debt has decreased by about a third among that age bracket — from an average of $3,073 per person to $2,087.

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While the Great Recession can seen as a precipitating factor for the shift in precipitation, the declining use of credit cards among young consumers can also be attributed to other, smaller causes. Prepaid debit cards have become attractive alternatives, partly because there has been very aggressive marketing of prepaid debit cards over the past few years, targeting young people and minorities, according to SmartCredit.com’s president of consumer education John Ulzheimer. “So it’s not a surprise that more young people are using prepaid debit cards over credit cards,” he told CNN.

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It is also more difficult for young people to get credit cards. The CARD Act — or Credit Card Accountability Responsibility and Disclosure Act, which took effect in 2010 — requires consumers under age 21 to have a co-signer or to earn enough income to make full payments. FICO found that these provisions have made it more difficult for younger consumers to qualify for credit cards.

Even though student loan debt has ballooned, overall debt has dropped among this younger group due to a rapid decline in other debts like mortgages. This shedding of debt has translated into high credit scores, with the number of consumers 18 to 29 years old with FICO scores of 760 or higher increasing from 8.6 percent in 2005 to 11.2 percent in the past year.

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But the statistics show a far different reality for older Americans. While they also lowered their credit card debit in recent years, they accumulated more auto and mortgage debt. As a result, consumers age 40 and older had more overall debt in 2012 than they did in 2005, and consequently, FICO credit scores have fallen 1.7 percentage points among those consumers in the 40 to 49 age group, 1.8 percentage points for those ages 50 to 59, and 3.8 percentage points for consumers 60 and older.

Ironically, while young consumers are decreasing their debt levels, “parents are having to take on more debt to help their kids make ends meet,” said Ulzheimer. “And, thanks again to the CARD Act, more parents are being asked to co-sign for their younger non-working children who want a credit card.”

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