How Millennials Are Avoiding Credit Card Debt

The following is a post by MPFJ staff writer, Toi Williams, who is a professional finance blogger for MarketBeat. She has backgrounds in personal finance, sales, and real estate.

Young Americans under the age of 35, who are often referred to as millennials, are increasingly avoiding credit cards and the debt that tends to come with them. Roughly 63 percent of millennials don’t have a credit card, versus only 35 percent of older adults, according to data from the Federal Reserve. The data also suggested that millennials are using credit cards less than people of a similar age did in the past.

The number of Americans under the age of 35 holding credit card debt has reached its lowest level since the data was first collected in 1989. According to the Survey of Consumer Finances, roughly 37 percent of American households headed by someone aged 35 and under held credit card debt in 2013. That is down nearly a quarter from immediately before the financial crisis that began in 2008. The level has not fallen as much for any other age group.

 

Reasons For Avoiding Credit Cards

There are numerous reasons for millennials’ avoidance of credit cards. Some young Americans say that they are avoiding credit cards because they have lived through the damage such debt caused during the financial crisis. Others say that they avoid credit cards because they do not trust the financial markets. Some watched as consumer and small business credit lines were cut off in the midst of the financial crisis.

Some millennials are dealing with much larger student debt loads than previous generations. The Project for Student Debt found that student debt increased an average of 6 percent each year from 2008 to 2012. According to federal data, the average American under the age of 35 now has $17,200 of student debt. That is 182 percent higher than Americans of the same age had in 1995. These burdensome student debt loads make it hard for them to take on any more debt.

Laws passed after the financial crisis also make it much harder for younger people to secure credit cards. The Credit Card Accountability, Responsibility and Disclosure Act of 2009, or CARD Act, mandated that borrowers must prove they have the means to repay the debt. The CARD Act also altered the lending landscape by restricting the ability of banks to market their products on college campuses. Today, many of the tents that credit card companies used to pitch all over college campuses to advertise their products have vanished.

Many young Americans believe the risks involved with debt outweigh the benefits. Credit cards offer the temptation to spend beyond one’s means. The idea with a credit card is you’re essentially putting money down that you don’t have and making a promise to repay it back with additional money for the convenience of having what you want right now. Some millennials simply prefer to pay for things as they go, without having to worry about paying a bill later.

Millions of millennials are using payment methods that do not involve debt for their purchases. Debit cards, which draw funds directly from a bank account, offer many of the same payment advantages as credit cards without the risk of accumulating debt. For online purchases, an app like Venmo or an online payment service like PayPal can be used.

 

The Consequences of Avoiding Credit Cards

Millennials’ avoidance of credit cards could prove detrimental in the long term, not just for them, but for the financial system as well. Historically, credit card use during the young adult years have made Americans more comfortable with making larger purchases with debt when they are older. Having a credit card also helped them establish a credit score, giving them more access to financial services later in life.

Having a good credit score is more important for this generation than previous ones because today, many more things are tied to credit scores. Credit scores are used to determine interest rates on mortgages and personal loans, may be used as a qualification for a rental home or employment opportunity, and may be used in the determination of insurance premiums. Those with low credit scores or non-existent credit histories find themselves paying more for the same financial services that others obtain at a much lower rate.

Fortunately, millennials don’t need to go into debt to get a good credit score. By paying off the credit card debt completely each month, they can still have good reports sent to the credit bureaus based on the open account. However, a survey by Bankrate found that only 40 percent of millennials with credit cards pay off their balances in full each month, compared with 53 percent of older adults. Millennials were also most likely to miss payments completely.

 

Finding a Good Credit Card

For millennials that do choose to use a credit card, picking the right card is key. Those just starting with credit cards should choose the card with the lowest annual interest rate without being distracted by offers for cash back or rewards. Until you have experience using the card, you will not know whether the rewards offered are worth it or even if you will spend enough to qualify for the rewards. You can always get an additional card with rewards after you have established your credit history.

Finding a credit card with a reasonable interest rate may be difficult for most millennials. According to Experian, the average millennial has a VantageScore of 628, which lenders largely consider subprime. Even for millennials with higher scores, the lowest available APRs offered on new credit cards topped 15 percent on average last summer according to CreditCards.com, marking a five-year high. These rates are expected to rise with future rate hikes by the Federal Reserve, as there are legal limits on certain card fees but no limit on APRs.

While choosing the best interest rate seems simple, it isn’t. Even after you have the card, it’s best to simply assume that the company can change your rate at any time for any reason. The key to ensuring that the rate stays as low as possible is minding the fine print and playing by the rules.

Be aware of when introductory offers end and what transactions they apply to. Review the information for all the fees that apply to the card, including annual fees, balance transfer fees, and cash advance fees, even if you don’t think you would ever use that service. There are many websites available online that will compile the information for several different cards into an easy to read format for comparison.

***Photo courtesy of https://www.flickr.com/photos/128185330@N03/17705922131/in/

8 Tips to Help Repair Your Bad Credit

The following is a guest post. Enjoy! 

Have you had some financial missteps over the course of the past few years? Is your credit score less than ideal? If you answered yes, you’re definitely not alone. Failing credit scores have become one of the largest victims of the recession and financial crisis. Unfortunately, that’s the number banks, mortgage lenders and credit companies use to determine whether you can get credit and what interest rate you qualify for. It can now even impact the rate of your insurance premium or ability to get a good job. The following tips can help you repair your bad credit and gain some financial independence.

Fix Errors

Making unfortunate financial mistakes in the past can be bad enough. But you don’t want to be penalized for errors that you didn’t make. With close to 70 percent having errors, your credit report may be included. To eliminate any errors, you can obtain your own free credit report and analyze it for blemishes. If you find something that could be wreaking havoc with your credit score, fix it immediately. Then when it’s time to sell your house quickly and purchase something new, you’ll be ready.

Credit Repair Services

If you’ve tried your hand at repairing your credit score on your own, you may have hit some road blocks. That’s why many individuals hand this job over to an expert. Although a credit repair firm has the resources to tackle your disputes, you may not know where to turn. There are credit repair firms ready to take your money. There are also those who are legitimate. The best credit repair companies will know the regulations in place to help repair your credit. Based on user reviews, consumers will be able to make the best educated decision on who is reputable and those that are scammers.

Catch Up on Payments

If you’re having issues making a payment for your debt, you can work out a plan. Whether you consult a non-profit counseling agency or you contact the creditor directly, you may be able to negotiate better payment terms.

Timely Payments

How you pay down your debt will have a huge impact on your credit score. Going forward, plan on paying your credit card payments, auto loans, mortgage or rent on time each month. Your utility bills such as cable, gas and electric can also have an impact. If you miss a payment, contact the creditor immediately and ask if the late payment can be removed.

Establish Credit

You won’t be able to build your credit history without credit. Unfortunately, in order to achieve a good credit score, you need to get credit. To establish your own positive credit, check with your bank first. They may offer a secured credit card for individuals with a checking or savings account.

Upgrade to an Unsecured Card

Once you’ve made timely payments on your secured credit card, see if you’re able to upgrade to an unsecured card. You may want to begin by applying to a local department store. At the end of each month, make sure you can pay your bill in full.

Pay Down Debt

If you have outstanding debt, you want to pay down as much as you can. Set a budget to determine how much money you need for bills. Whatever is left over, use it to pay off your credit cards.

Avoid Credit Card Closures

Closing a credit card that you’ve had for a significant amount of time can have a negative impact on your credit score. If it’s the annual fee that you disagree with, ask the creditor to waive the fee or switch you to a card without one.

The History of Debt in America

credit-cards-cash-my-personal-finance-journeyThe following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

Although the idea of credit in some form has been around for centuries, never has America been in such a state concerning credit and debt as it has been these last ten years or so.

During pioneer days, credit would be given out by individual stores based on the debtor’s relationship with the proprietor and their history of repayment.

This type of debt was accrued most often by farmers who received most of their year’s income in a lump sum at harvest time. Farmers would “buy” things on credit with the local merchants in the nearest town, promising to pay the balance in full at harvest time.

Defaults were rare, as most merchants had a strict rule that any default on debt owed meant no credit would be extended again. As such, people worked hard to pay their credit balances due, no matter what they had to sacrifice to do it.

As farming jobs decreased with the industrial age, store credit at local merchants was offered to more people, but the rules were still the same: pay your bill in full or lose your option for credit.

It was in the mid-1940’s that different individual businessmen started dabbling with the idea of a credit “card”.

The first official credit card was the Diners Club card, which entered the scene in 1950. The Diners Club company’s target audience was traveling businessmen with the goal of making paying for meals and entertainment while on the road easier for them.

In 1960, Bank of America issued the first credit card that mimicked what we see today, called the BankAmericard. As with all things progressive, competitors soon opened up and the “big three” of credit cards – Visa, Mastercard and American Express – were running the show by the time we entered the 1970’s.

Consumers and Credit Card Debt

When credit cards first made an appearance on the scene, those who were approved for cards like the Diners Club card were few and far between.

I remember that in the 70’s my parents – and many other parents that I knew – simply didn’t own a credit card because they couldn’t get approved for one. One had to show a proven higher income and propensity for repayment in order to get approved for a credit card.

In 1977, the Equal Opportunity Credit Act was finalized, making it illegal for credit card companies to deny a credit card application based on gender, race, national origin and marital status. The act also required that applicants who were denied credit be told in writing the reasons why.

While this was a great law on many fronts, it also dramatically broadened the ability of the average person to obtain approval for revolving credit.

The Beginning of the Consumer Debt Boom

When the 1982 recession ended, interest rates plummeted, people started to feel more secure in their financial situations and the use of credit began to rise dramatically.

The chart below shows the history of outstanding consumer credit card balances in billions.

credit-card-balance-chart-my-personal-finance-journey

(Link for chart: http://www.mybudget360.com/credit-card-withdrawal-banks-pull-financial-plug-bankruptcy-on-rise-bankruptcy-up-credit-down/ )

The ease of getting a credit card, the increase of marketing and advertising, and America’s increasing love affair with instant gratification meant people were spending more – whether they had the money to do so or not.

It soon became “normal” to have credit card debt.

These three facts from Wikipedia give hardcore numbers showing the increase of America’s comfort with using debt as a way to fund life without the cash to do so:

  • Household debt as a percentage of disposable income rose from 68% in 1980 to a peak of 128% in 2007, prior to dropping to 112% by 2011
  • S. household debt rose from nearly zero in the 1950s to $13.8 trillion in 2008, before declining to $12.9 trillion by Q2 2012
  • Consumer credit outstanding includes credit cards, auto loans, student loans, and other types of household debt, but excludes mortgages. It rose from 14.0% GDP in January 1990 to 18.0% GDP by January 2009. It fell to a trough of 16.4% GDP in July 2010 and was back up to 17.5% GDP by January 2013

As is evident, in spite of economic scares in the last decade, America’s love affair with credit is far from over. Proof of this lies in the fact that the average credit card balance of those who carry a balance is over $15,000.

As long as we as Americans continue to be comfortable carrying large amounts of consumer debt, we continue to put ourselves at risk for financial trouble down the road. However, there are things that you can do to help protect yourself from future economic downfalls.

  1. Get a handle on your true financial goals. Figure out what you really want from your money and begin thinking long-term about your future financial security.
  2. Design a workable budget for yourself and/or your family that helps you to achieve your financial goals – and stick to it.
  3. Cut spending wherever necessary so that you can dump your debt as soon as possible. Keep your long-term financial goals in mind as you work to get out of debt.
  4. Persevere through setbacks and temptations to buy. Keep in mind that the more financially secure you are, the more choices you’ll have about how to live life and the easier it will be to handle personal and external economic downfalls.

Carrying consumer debt balances has now become an acceptable way of life for many people, but it doesn’t have to be that way for you.

Join the growing number of people working to become debt free once and for all. I’m willing to bet you’ll find the end result well worth the effort.

How about you all? What debt fact in this article surprised you most?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/smemon/12696360474/

How We Nickel and Dimed Ourselves into Massive Credit Card Debt

credit-cards-my-personal-finance-journeyThe following post is by MPFJ staff writer, Laurie Blank.  Laurie is a wife, mother to 4 and homesteader who blogs about personal finance, self-sufficiency and life in general over at The Frugal Farmer. Part witty, part introspective and part silly, her goal in blogging is to help others find their way to financial freedom and to a simpler, more peaceful life.

Many people who’ve gotten themselves into massive amounts of debt have a pivotal moment when they made a decision to take on a lot of debt. Maybe they went back to school for their Master’s degree. Or maybe there were medical expenses from a surgery or other incident.

Our case was different: we literally nickel and dimed ourselves into huge amounts of debt to the tune of tens of thousands of dollars.

How it Happened

I can honestly say looking back that we’d never really been concerned with managing money properly during the first fifteen years or so of our marriage. We’d get into debt, get out of debt, not really ever having a plan for our money.

Instead, we spent as we wished and when things got too tight we’d panic and pay off the debt in one way or another, usually by cashing in an investment or a retirement account.

In 2010 my husband got laid off due to the recession and our one-income family of six officially became a no-income family. As usual, we didn’t panic; after all there was a three-month severance package and unemployment to help us along after that.

Seven months later Rick got a job offer that left us with a tough decision: the job was with a major company that he’d always wanted to work for, however the pay they offered was 20 percent less than what he’d been making at his old job.

In our “wisdom”, we decided that he should take the job and that we’d simply use credit cards to cover the salary difference until he worked up to the salary he’d been paid at his old job. Looking back, I’m amazed that we talked very little of cutting expenses or changing our lifestyle. In our uneducated opinion, we “really didn’t spend that much money.”

At the time we lived in an affluent suburb, and since we spent “much less than most people” we knew and lived by, we accepted our expenses as reasonable, even though we had very little idea what those expenses actually were.

Our Financial Wake-Up Call

Two years after Rick started his new job, we sold our home in the suburbs and moved to a small hobby farm, eager for a more quiet life with our children. The move to the country was a real eye-opener for us. We felt as if we were viewing “normal” life from the outside looking in. In the country, no one cared about what we drove, what we wore or what activities the kids were in.

They simply cared about the content of our character, to quote MLK Jr. As we pondered this new way of living where the Joneses didn’t matter, we sat down to take a real look at our finances. When we added up all of our credit card debt, we were dumbfounded at the astronomically high numbers.

Searching for answers, we went back and looked at our bank statements for 2012, writing down all that we spent on groceries, entertainment, clothing and the like. The numbers were shocking. Even though we thought we “never” went out to eat, we were spending nearly $300 a month on drive-thru runs, occasional restaurant meals and trips to the snack bar at the local big box store.

The grocery numbers brought similar shock. In our vague attempt at budgeting, we’d set our grocery budget for our family of six at a reasonable $600 a month. In reality, we were spending $900 a month on groceries due to a lack of good menu planning and runs to pick up random “stuff” here and there at the grocery store.

Suddenly, it became all too clear why we were in so much debt. In a panic, I began googling terms like “how to get out of debt” and found the wonderful world of personal finance blogs. I’d never read a blog before, but I was soaking them up now as I read about dozens of others who had found themselves in massive debt but worked their way to debt freedom.

For the first time in our lives, we began living off of a real budget and tracking all of our spending starting in January of 2013. While budgeting had always seemed invasive and restrictive to us in the past, we decided to give a real go at it and fell in love with being in control of our money. For the first time in our marriage, we knew where our money was going and we had a plan for what we wanted to do with it.

There have been many ups and downs for us financially in the three years since we first began living with a plan for our money and working to pay off debt. Major home repair expenses and other unexpected costs, combined with a super high debt-to-income ratio (we started at 65%), have made our journey to debt freedom a “one step forward, two steps back” kind of a journey.

But we are winning our battle to dump debt. If all goes as planned, our tens of thousands in consumer debt will be paid off by the end of 2016.

If you’re feeling overwhelmed by your debt, or wondering how you got in debt in the first place, don’t give up hope. With a solid plan and a commitment to persevere, you too can become debt free.

How about you all? Have you ever struggled with debt? Have you ever had a financial “wake-up” call?

Share your experiences by commenting below!

***Photo courtesy https://www.flickr.com/photos/armydre2008/2969764323/

Security Enabled Chip Credit Cards

You may or may not have heard by now, but the credit card industry in the United States is moving over to what is known as EMV chip-enabled credit cards. You might have even received your replacement card in the mail by now, and may have already experienced the new way of paying in some stores that use updated credit card swiping equipment.

What are EMV Chip-Enabled Credit Cards?

EMV stands for “Europay, Mastercard, and Visa”, and utilizes a special computer microchip to authenticate purchases made by the card. In other words, EMV chip-enabled credit cards have an extra security measure in place to help prevent someone from stealing your card and to prevent credit card fraud.  These cards still have the magnetic strip on the back, which will still work if the retail establishment you are visiting does not yet have the technology to read the special EMV chip inside your card.

How is EMV different than traditional magnetic strip cards?

With traditional credit cards with just the magnetic strip on the back, whenever you swipe your card at the register, there is a certain amount of data that is transferred from the card to the merchant that never changes.  So, a thief or fraudster could in theory just need to steal your data on one random occasion and be able to use your credit card account over and over again.

However, with the EMV cards, the data that is transferred from your card to the merchant changes every single time you swipe your card.  Therefore, if a thief tries to steal this data, when they go to use it again for their own fraudulent purposes, it will not work and they will not be able to use your card, since the data has already been used once and cannot be used again.

Therefore, this new technology makes it much harder for credit card thieves to steal your information and wreak havoc on your credit!

How do you use the EMV card?

Not all merchants are equipped with the new readers for the cards yet, so for those places, you’ll just swipe your card like any other using the magnetic strip.

For those merchants that have the right technology, you’ll see a new slot in the bottom of the card scanner where you need to insert your card following the instructions on the machine.  Unlike the swiping method, you’ll actually leave your card in the machine for a few seconds and once the transaction is approved, it will tell you to remove your card.

Want more information?

Discover is one of many credit card companies that are excited to share this new technology with consumers. If you have more questions about EMV technology, the massive shift toward having every single credit card equipped with this technology, or if you want to just watch some videos on how to use the cards before you have to use them yourself, check out their EMV Resource Center online to find the answers to all your questions and concerns.