The financial crisis shaped millennials’ spending habits, as many of them saw what large debts can do to everyone from homeowners to massive banks. That experience has, for both better or worse, made a big impact on how this generation views credit cards. A recent report from NerdWallet shows a third of all millennials have never applied for a credit card. Partly because of this, millennials have the lowest credit scores compared to any other demographic.
Twenty-eight percent of millennials have a credit score below 579, which is far below the national average of 687. These low credit scores mean big trouble in the future. With low credit scores, people will struggle to obtain loans at competitive rates or even rent an apartment.
For a couple reasons, the current habits of people aged from 18 to 34 year olds means it might be difficult for credit scores to improve in the future.
The first reason is that 31 percent of millennials have never applied for a credit card. While avoiding racking up debt and living beyond their means is an admirable goal (as the average credit card debt for a household is a staggering $16,000), the downside to living without a credit card is that they’re unable to build up their scores and prove their reliability to lenders. Down the road, this makes buying a car, getting a home mortgage and making other important purchases much more difficult. Some employers always take credit scores into account when hiring someone.
Those with the lowest credit scores have the opposite problem of never having a credit card. These people are obtaining too many credit cards, and it turns out many of these cards aren’t right for them. Almost half of all millennials pick a credit card based on an ad or a promotion. Only 21 percent picked a card based on research and reviews.
Each new credit card slightly lowers a person’s credit score, whether the applications is accepted or denied for the card. Retailers push new credit cards on consumers at an incredible rate, but for most people these types of cards aren’t worthwhile. Broader cards that provide rewards to more than one business is often a better bet. However, it’s not always the case.
A problem that all credit card users –and not just millennials – face is whether a rewards card with an annual fee is worth it. Fifty-two percent of people surveyed reported that they switched their credit cards to get a more generous rewards program. With an average annual fee of $58, a person would have to spend more than $5,000 to justify the rewards card. Not everyone spends enough to make the card worth the fee.
What Can be Done?
Credit cards are incredibly useful, both for convenience and for building credit scores. Avoiding credit cards outright isn’t recommended, nor is abusing them by building up unsustainable debts that damage your credit score. There are measures to take that can make credit cards worthwhile.
The most important thing is to do research. Going through the fine print of a credit card can be both tedious and confusing, but fortunately there are a number of review sites that provide objective takes on the different credit cards. Essentially, ignore the flashy advertising and the junk mail to find out the card what card is actually the best.
Another measure to take is to avoid applying for credit cards too often. “A good rule of thumb is to wait six months to a year between card applications,” says Sean McQuay, credit card expert at NerdWallet.
Habits can change, and in time millennials’ credit card habits might improve. But at the moment, millennial credit scores will reflect this struggle for the near future.