Here’s what millennials are doing right — and wrong — when it comes to credit
Millennials make good credit card decisions, but also bad ones. Here’s where millennials go wrong and what they do right. Image source: Getty Images.
Credit cards can be a useful tool for earning rewards and building your credit, but they can also be an albatross that ruins your financial life if you use them the wrong way. Unfortunately, many people of all ages make mistakes with credit cards that end up costing them dearly, including millennials.
But the good news is that many of the younger generation have learned from the mistakes of their older peers and are avoiding some of the common credit card mistakes they’ve made. In fact, there are a lot of things millennials do well when it comes to credit cards, even if they aren’t perfect.
Millennials are in debt, but not as much
The bad news is that millennials, like almost every other American, have credit card debt. In fact, in a recent study, The Ascent found that a total of 60% of all Americans have credit card debt.
But, even if they’re in debt, millennials don’t owe as much as their older counterparts — and few millennials make the mistake of owing money on their cards. Only 56.7% of millennials have credit card debt, compared to 67.6% of Gen Xers and 65.6% of baby boomers. Millennials who also owe less, with an average debt of $5,453, compared to $6,627 for Gen Xers and $6,800 for Baby Boomers.
Millennials are less likely to use balance transfers
While millennials manage credit card balances smarter by keeping their balances lower, they’re less likely to use a helpful tool to reduce credit card interest: balance transfers.
Only 32.6% of millennials said they used a balance transfer to consolidate debt, compared to 46.1% of Gen Xers and 50.8% of baby boomers. Unfortunately, by avoiding balance transfer cards, young people risk missing out on an important opportunity to lower their interest costs and get out of debt faster.
Balance transfers are simple and easy to do if you can qualify for a balance transfer card with a 0% promotional rate, and often the balance transfer is free if you can find a no-fee card. Although you need a plan to pay off the balance before the 0% rate expires and your interest charges increase, millennials should seriously consider exploring this option to help them deal with debt. of credit card they have.
Millennials may be too focused on rewards rather than APR
Many millennials see credit cards as a tool for earning rewards. In fact, millennials were more than twice as likely as baby boomers to care about bonus offers, including rewards and cashback, compared to baby boomers.
It can make sense if you’ll pay off the balance in full each month — but remember, the majority of millennials have credit card debt. If you owe money, you should make the APR the top priority because no amount of reward points can offset a high interest rate. One of the reasons baby boomers may be 39% more likely than millennials to care about APR is that baby boomers are twice as likely to actually understand what APR means compared to their younger counterparts.
The APR, or annual percentage rate, is the cost you pay to borrow, including fees and interest. If you don’t understand what APR means, you need to learn before you choose a card. And if you think you have a balance, look for the lowest APR possible even if you have to sacrifice rewards to do so.
But millennials use cards for the right reasons
While millennials may focus on the wrong thing when choosing a credit card, they have the best reason of any generation for using cards. Nearly 72% of young people say they have a card to build their credit history, compared to 58.2% of Generation X and 39.3% of baby boomers.
Using cards to build credit history is the smartest reason to get a credit card. When you have a card and make payments on time each month, it increases your credit score. And if you keep your credit utilization rate below 30% (or as low as possible), that also helps you get a good score. Building credit can make all your loans more affordable in the future, and a good score is the foundation of a strong financial life.
There’s room for improvement – but millennials are doing a lot of good
While millennials should be focused on paying off debt — and looking for a low APR or transferring balance to achieve that — they have the foresight to use credit. But it’s important to remember that you don’t need to have a balance to build credit, and keeping a low balance is key to getting the best credit score possible.
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