Millennials are a complicated bunch. While it’s easy to label this batch of recent grads as the “debt generation,” it’s also just as appropriate to label this generation as “debt-averse.” After watching their parents suffer through the aftermath of the housing bubble bursting (which, for some, included foreclosure on their childhood homes) and feeling burned by student loan debt, Millennials are avoiding borrowing more than they have to.
And less borrowing for twenty-somethings is both a good and a bad thing.
On the upside, Millennials are charging less on credit cards and thus racking up less credit card debt than later generations. In fact, many are opting out of credit cards altogether. A recent survey shows that more than 6 out of 10 Millennials don’t own a single credit card – a shocking number when you compare that to only 35 percent of over-thirties who have opted out of cards. Many experts point to the poor economy and the piles of student loan debt owed by Millennials as reasons why they’re shying away from credit cards and choosing debit cards or prepaid cards instead. This can be seen as a positive signal that this generation is opting out of the “debt is okay” consumer philosophy that can lead to unmanageable credit card bills and financial trouble.
On the downside, not having a credit card may mean that Millennials are missing out on boosting their credit scores. Twenty-somethings without any debt or with only student loans to their names could either have a thin credit file or poor credit history if they’ve fallen behind on their student loan payments. Having poor credit history and no credit history are both bad news for Millennials who eventually want to qualify for a bigger loan – like a car loan or a mortgage – in the future. Without established, positive credit, twenty-somethings will be less likely to qualify for loans if they do choose to borrow later in life. So while opting out of credit cards today may be a good thing for their present-day budget, Millennials might be closing doors for themselves in the future.
So what’s the right strategy? Should Millennials be opening up credit cards, or are the majority of them making smart moves by avoiding them altogether?
When it comes to deciding whether or not to open up a credit card, it all comes down to a person’s ability to use it responsibly. Credit cards don’t cause debt; buying things that you can’t afford and spending more money than you earn cause debt. Millennials that do choose to use credit cards responsibly and pay their balance in full each month can not only both avoid the debt trap, but they can build positive credit history, too. Similarly, if there was ever a financial emergency that required a short-term loan, having a credit card on hand may be a money lifesaver.
So long as they are used wisely, credit cards aren’t necessarily a bad thing. But until Millennials recover from the shock of the housing crash and their mounting student loan debt, they may be opting out of charging on plastic for a few years to come.