Millennials: Love for cash eclipses credit cards - Here’s why

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By: Phil Bradford
on 5th Apr,2016

Check out the reasons why millennials are wary of credit cards instead of debit cards. Explore the ways to build credit without credit cards.
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Younger generations aka millennials are welcoming beards and tattoos but not credit cards. Surprisingly, every 1 out of 3 millennials never owned a ‘plastic’, a survey conducted by a popular financial website, CreditCards.Com revealed. This 1000-people survey was conducted by phone.

Reasons why people are rejecting credit cards

1. Credit cards weaken self-control: Millennials know that loss of self-control regarding money matters can lead to financial insecurity. They are aware that self-control can be difficult as well as boring. However, they also know that self-control with regards to financial matters can bring in some of the most lucrative rewards one can ever imagine. For instance, from staying both mentally and physically fit to buying a cushy home at an affordable price.

Read more: Millennials - Practical money rules for a sound financial life

2. Credit cards disrupt budget: For millennials, budgeting is an act of making a pen-and-paper list of one’s total monthly income and expenses. If one knows how much money is left in one’s pocket, then he/she will know how much exactly to spend.

Read more: Struggling with credit cards? Budget well to win over your debt

3. Credit card interest rates are costly: Millennials have become money wise. They know that if they buy an item for $1,000 using their credit card with a rate of 18% interest on the bill and if they make the minimum payment every month, then in a 12-month period, they will have to pay $175 in interest. On top of that, they will still have to clear out an outstanding balance of $946 on their purchase.

Read more: Debit card traps that you should be aware of

4. Credit card interest rates increase when not repaid in full: Millennials don’t want to add insult to their injuries. This is because they know that a highly attractive annual percentage rate (APR) on a credit card is short-lived. Such APRs are provided by the creditors as introductory offers. These affordable rates are subject to increase after their promotional periods are over and if the full balance remains unpaid beyond a set deadline.

5. A poor credit score can affect lifestyle: Millennials know that if they fail to repay their credit card balances on time, then their credit scores will tank. And it wouldn't surprise them at all if they are slapped with a costlier premium the next time their insurance policies are up for renewal and all because of poor credit score.

Read more: Money mistakes 20s should avoid to grow richer

6. Poor credit habits can ruin relationships: It is not unknown to the millennials that money is the root cause of many divorces and the reason why couples fight. Monetary issues are highly sensitive. This is all the more evident in the case of shortage of dollars. As a result, millennials now prefer budgeting, keeping their family and spouses in the process.

7. Credit cards lead to higher expenses: Though for millennials buying a $1,000 gadget via credit card is easier, yet they prefer to pay in cash, as doing so lets them feel the pain of parting with their hard earned dollars.

Read more: Money saving tips for newly employed millennials

8. Credit cards can lead to bankruptcy: Millennials don’t want to get into insurmountable debt. This is why they don’t want to go on a shopping spree without having a robust repayment plan. Hence, they are safe from debt as they can manage sudden periods of unemployment or gigantic medical bills.

9. Credit cards rob peace of mind: Millennials want less fuss in lives. This makes them avoid credit cards as staying debt free allows them to relax because they don’t have to worry about over-limit fees, credit limit, late fines, interest, yearly charges and so on. For them, saving money before buying any item is the most suitable strategy as they can gauge their own affordability in accordance with the present rate of inflation.

2 Financial factors that made millennials wary of credit cards

1. Recession

The recession made a big impact upon the millennials. In 2012, 36 percent of millennials were living with their parents. Meanwhile, the unemployment rate for the people between 16 and 24 years in 2014 was 14.2 percent. No wonder, millennials became wary of making payments through credit cards and incur fresh debt.

2. Student loan debt

Seventy-one percent millennials graduated with student loan debt in 2012 with an average amount of $29,400. Students who graduated from for-profit colleges carried a debt load of $39,950 in the same year. It may take decades to pay off these debts. Naturally, millennial wouldn’t want to take up more debt load on their shoulder.

Read more: Millennials in defence: How young people should manage their money

Million millennials are not qualifying for credit cards

As per a recent VantageScore survey, credit card applications of one-third of millennials were reportedly turned down since they didn't have any credit score. As per the result of the survey, 34 percent of millennials didn’t have a credit score and 42 percent had a very short credit history.

A credit report is not enough to qualify for credit cards. Lenders and credit card companies would make their final decision on the basis of the information that is there on credit reports. Thin credit history won’t be of any help for the millennials.

Some millennials are using alternate information such as rental payments, cell phone bills, utility bills to build credit history. Unfortunately, this information is not yet widely accepted in the lending industry. So, millennials are left with only a few borrowing options.

Alternative borrowing options apart from credit cards

  • Payday loans
  • Pawn lending

Payday loans come at a very high-interest rate. So, millennials end up getting into fresh financial trouble with these loans.

No credit equals to no credit score

Excluding credit cards altogether could be a naive move, according to the financial experts. One of the reasons is the fast and convenient cashless payment facility provided by them. Moreover, credit cards also provide a strong platform to build an impressive credit score.

Good credit scores help consumers to qualify for affordable insurance policies, mortgage, cellphone plans, job placements, etc.

Rather being paranoid of credit cards and debt as a whole, millennials should seek to strike a fine balance between their income and expenses. This must be reflected in the responsible use of credit cards.

Read more: Credit card usage - 6 Wrong ways to use them

How millennials can build credit without a credit card

  • Pay on time: Millennials should make the minimum payment on their auto loans, student loans, installment loans before the last date. This would help to boost their credit.
  • Pay rents: Millennials can report their rental payments through williampaid.com website to Experian and build credit history.
  • Pay utility bill: Millennials should pay an utility bill or household bill (that is in your name) to build credit.
  • Grab a secured card: This is a good option for risk-averse millennials since it helps to build credit history without any trouble.

The ultimate deciding factor

A sinking economy and exponentially growing student loan debt have made a lot of millennials wary of credit cards. Moreover, the CARD Act of 2009 was implemented to safeguard consumers from sky-high interest rates and associated loan costs. Unfortunately, the same Act made it tougher for the millennials and other younger people to access credit cards.

It must be kept in mind that credit card is simply a mode of payment and that the balances must be repaid, instead of considering it as a debt instrument.

For millennials, borrowing money and making the repayments is a risky chore, hence, they tend to skirt the idea of getting into debt. Even though millennials have become risk averse as compared to their previous generation, yet they are knee deep in debt, and that prevents them from acquiring a fresh line of credit.

Therefore, debit cards and not credit cards have become the preferable mode of payments for the millennials. Millennials are mainly opting for prepaid debit cards that can be reloaded with fresh dollars and could be linked to their bank accounts.

Why more and more millennials are opting for debit cards

Given a choice, 7 out of 10 millennials would like to opt for debit cards instead of credit cards. The GenY is simply not interested in credit products due to these reasons:

  1. Millennials are not confident enough to control their spending triggers
  2. Millennials don’t want to struggle with credit card debts
  3. Debit cards give a feeling of sense and sensibility to millennials

Why millennials should change their attitude towards credit cards

  1. Better fraud protection: If your debit card gets stolen, then you may have to pay $500. But if your credit card gets stolen, then you have to pay only $50. The credit card company will refund the fraudulent charge almost immediately. It may take almost 14 days to get a refund in case of a debit card.
  2. Credit record: You need to have a long and good credit history to qualify for a loan in future. Debit cards won’t help you build credit. But, credit cards can help you do so as long as you make timely payments and don’t cross the credit limit. Credit history accounts for 15 percent of your credit score. The longer you avoid credit cards, the longer it will take to boost the credit score. Remember, your credit score will determine how much will you pay for credit card or mortgage interests.
  3. Reward programs: Millennials can get cash back or travel rewards on credit cards. This is a big advantage. They can use 20%-30% of their available credit and qualify for the reward programs. Debit cards don’t offer these benefits.

A word of wisdom for millennials

Debit cards may seem to be a safe bet to millennials since these financial tools won’t push them into debt trouble. But, it would be a mistake to abandon credit cards completely. Right budgeting strategies and a frugal lifestyle can help millennials to live within their means and reap the maximum benefits of credit cards.

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