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The Huge Mistake Millennials Are Making With Their Money

Posted
7/21/2013 9:15:00 AM
By: Motley Fool
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For decades, young adults have gotten themselves in trouble by maxing out their credit cards and digging themselves into a huge debt hole. Yet while millennials have developed what many believe is a healthy aversion to credit cards, their choice to give up on them entirely rather than using them prudently and responsibly will create its own problems.

A recent study from Fair Isaac 's FICO took a look at the demographics of credit card use lately. What they found is that outstanding credit card debt among 18- to 29-year-olds dropped from just over $3,000 in late 2007 to a bit over $2,000 last October. That move comes as part of a broader reduction in overall indebtedness, with drops in outstanding mortgage, auto, and most other debt more than offsetting a substantial rise in student-loan debt. Even more surprisingly, the proportion of young adults going without credit cards entirely has risen to nearly one in six, almost double the level from late 2005.

Aren't millennials being smart about credit cards?
Many consumer-finance experts are applauding the decisions of young adults to avoid credit cards, noting the effectiveness of regulations like the CARD Act that limited access to credit cards for those under 21. Moreover, using alternatives like electronic payments and debit cards can help people avoid spending beyond their means, as such payment methods are usually tied to accounts that need to have money present for transactions to get approved.


President Obama signing the CARD Act. Source: White House.

The fact that more young people have chosen not to carry balances and pay high interest rates for unnecessary loans is an unqualifiedly positive result . Yet not having credit cards at all is one step too far, as it prevents young adults from enjoying many benefits that credit cards have over alternatives:

Many millennials answer these objections by arguing that they don't want to add to their debt levels. Yet there's no requirement that you misuse credit cards by carrying a balance. One strategy you can follow is to treat credit cards exactly as you would debit cards, entering every purchase in your checkbook and taking the money mentally out of your account. Then, all you have to do is make your payment in full every month to reconcile your account balance and get all the benefits of credit cards without any of the hassles.

Give credit a try
Not carrying a credit card balance is smart, but not having a credit card at all is a big mistake. If millennials are prudent enough to live without credit cards entirely, they should be able to avoid temptation once they have one -- while reaping the potential benefits that can come in handy from time to time.

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Fool contributor Dan Caplinger owns warrants on Wells Fargo and Bank of America. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends Bank of America and Wells Fargo and owns shares of Bank of America, Citigroup, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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