A 2016 survey from Bankrate found that just 33% of young adults aged 18 to 29 hold a credit card from a major issuer (American Express, MasterCard, Visa, or Discover). This is in contrast to 55% of those aged 30 to 49, and 62% of those aged 50 to 64.
What’s causing millennials to steer clear of credit cards? Many of my fellow millennials seem to be wary of debt, particularly after watching their parents and others suffer, in the aftermath of the 2008 financial crisis. For others, large amounts of student debt, not to mention underemployment, have made credit cards a seemingly unaffordable luxury. What’s more, the 2009 CARD Act restricted offerings of credit cards to those under the age of 21, and as well as marketing of credit cards on college campuses, making it less likely that younger Millennials would be sold on these cards.
At the same time, millennials aren’t necessarily steering clear of credit, as they seem to be using personal loans, as well as auto loans and leases, at a higher rate than some previous generations. Also, select credit cards, such as the Chase Sapphire Reserve, has been a hit amongst relatively affluent, travel-focused millennials.
Yet, the truth is, more millennials should make use of credit cards. Why? It’s true that we can earn lots of travel and rewards points from credit cards (The Points Guy has offered excellent strategies), although not everyone is interested in learning such hacks, and for them, credit cards might seem to be of limited value. The reality is that without having credit cards, one isn’t likely to enjoy the very best credit scores, which will end up costing you more money on your mortgages, auto loans, home and auto insurance, and more.
As we’ve discussed before, your credit score is made up of five factors. The second most important factor, accounting for 30% of your credit score, is the amount of debt you are carrying, relative to your account limits, or original amounts lent. It is widely believed that your revolving account (i.e. credit card) debt, counts for a greater portion of your debt score, than your installment account debts (i.e. personal loan, student loan, and other fixed amount loans). If you aren’t making use of any revolving accounts, you likely aren’t maximizing this part of your credit score.
The fourth factor is your credit mix, or the different types of credit accounts you have open, that is, a range of revolving and installment accounts. This makes up 10% of your credit score. If you don’t have any credit cards, but rather, just installment accounts, you won’t be showing a strong mix of credit, and likely won’t enjoy the top tier of FICO scores, required for the very best terms on mortgages, auto loans, and insurance.
How much does a non-premium FICO score cost you? Over the course of a lifetime, potentially, hundreds of thousands of dollars. To obtain the very best mortgage terms, you’ll need a FICO score of 760 or higher. Otherwise, you’ll end up possibly paying tens of thousands of dollars extra, over the course of a lifetime, certainly on a mortgage, auto loan, or home or auto insurance, and possibly on credit cards and personal loans as well.
At the same time, the fear of excessive debt, and the negative financial consequences which it carries, is completely reasonable. It is bad to spend too much money, and to carry excessive balances on one’s credit cards. Yet, it isn’t as if our only choices are racking up high balances on credit cards, or not using credit cards at all. The best way to preserve one’s credit score is by keeping a balance of below 30% on every credit card, and paying the card on time each month. Even better, if you can keep a balance of 1 to 5% on one card, and zero balance on the others (but keep them open), you’ll further maximize your credit score. Of course, always make sure that you pay your cards on time.
By making smart use of credit cards, millennials can maximize their credit score, to enjoy the best possible terms on their mortgage or auto loans or leases, while not suffering the consequences of excessive credit card debt. Begin to implement these strategies today, and your credit can soar. If you are a real estate or lending professional guiding millennial clients, remind them that a credit card can often be the first step towards the savings and increased options that better credit makes possible.
Shiva Bhaskar is an experienced consumer credit attorney, and the cofounder of Tier One Credit (www.tieronecredit.com), a credit consulting firm dedicated to helping every American enjoy the best credit score possible. Shiva can be reached by email at [email protected].
