Almost two-thirds of millennials don't have a credit card, according to a recent study from Bankrate.com, but only 35 percent of adults over 30 shy away from plastic. When the figures were revealed, cheers went up from the Dave Ramsey loyalists who believe credit cards are the financial equivalent to the serpent in the Garden of Eden. But other (perhaps more practical) personal finance experts point to the potential pitfalls of avoiding credit cards.
Can That Really Be True?
When I first read the above stat, I thought it must be grossly inaccurate. As a millennial, I started to poll random friends and only found one who shied away from owning plastic. Then it dawned on me that the study identifies millennials as 18 to 29. This means college-aged millennials are the anchors, dragging down the overall number.
The Credit Card Accountability Responsibility and Disclosure Act of 2009 made it more difficult for college students to get credit cards. Purveyors of plastic no longer invade campuses in the fall to woo students with T-shirts in exchange for signing on the dotted line, because people younger than 21 cannot be offered pre-approved credit cards. Instead, the average young millennial must provide proof of income or have a co-signer older than 21 to obtain a credit card.
It's certainly plausible the average college student is simply swiping with a debit card and never bothering to consider a credit card. Lest we forget, today's young millennials spent their teenage years hearing about the economy being in a recession and watching the rise of movements like Occupy Wall Street.
This past-negative outlook isn't exclusive to the younger millennials. Those inching closer to 30 were of college age before the CARD Act, and many fell into some debt before they learned how to use credit cards responsibly. They certainly wouldn't be the first demographic to go through a phase of cutting up cards and swearing off credit for life after digging out of the red.
The Benefits of Credit Cards
Do credit cards cause debt? No. Does spending more money than you make cause debt? Yes.
The fact that you possess a credit card doesn't inevitably mean you'll walk down the evil road to debt. Plenty of Americans hold credit cards from a relatively young age and pay almost no interest to their lenders.
In fact, getting your first credit card as early as you can is an advantage when it comes to your credit report and score. Fifteen percent of your credit score is based on the length of your credit history. Opening a credit card at 18 and using it responsibly through college, paying it off on time and in full each month can lead to a 700-plus credit score by graduation.
The higher a credit score, the lower the interest rates on loans like a mortgage or an auto loan. Credit scores are even used by landlords to approve tenants.
Even those who can buy a car or home outright in cash will sometimes elect for a low-interest rate loan (2 percent or less) and then invest the difference after a down payment in a long-term investment, which they anticipate a return of 6 percent or higher.
Avoiding the Debt Trap
The action of swiping a credit card instead of handing over money often makes it easier for people to spend more (why else would stores pay interchange fees?). The psychology of using cards vs. cash is why it's important to budget and use a credit card for standard purchases like gas and groceries and not to fund a spur-of-the-moment trip to Paris.
Remember, you don't have to incur revolving debt to use a credit card and boost your credit score. Only spend what you can pay off in full each month, even if that's just a single cup of a coffee. Carrying a balance on your card does nothing except make you pay interest to your lender.
Why Millennials Might Be Able to Avoid a Credit Card
Millennials, as a general group, are in some major debt. The average student loan debt is $29,000, and 40 million Americans have at least one student loan, according to recent data from Experian (EXPN).
It's unfortunate that credit scores are linked only to debt-making tools, but those with student loans can use this to their advantage. Students or graduates wary of getting a credit card can use their student loans to prove their reliability to lenders and the credit bureaus by making their payments on time.
However, once student loans are paid off, an individual's credit score will begin to decline and eventually vanish if he or she doesn't have another type of loan or a credit card.
Ultimately, a Credit Card Could Make Life Easy
As with nearly all money-related topics, the debate about whether or not to own a credit card could go on indefinitely. There are numerous factors to consider, and each person's level of responsibility and psychological relationship to money plays a huge role. But in the end, owning and responsibly using a credit is a simple way to build and maintain a strong credit score and report. And a strong credit score makes your financial life much easier.
Erin Lowry writes for DailyFinance on issues relating to millennials, money and personal finance. She is the blogger behind Broke Millennial, where her sarcastic sense of humor entertains and educates her peers. She is also the brand and content manager for MagnifyMoney.
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Yes they can.
The CARD Act did get rid of the most outrageous abuse: they can no longer increase the interest rate on existing balances unless you go 60 days past due.
However, you need to remember that:
Most credit card interest rates are variable and are linked to the prime rate. Your high rate will only go higher when interest rates increase.
Based upon risk, your credit card company can still increase your interest rate on all future purchases. Your existing balances are protected, but future purchases would be at the higher rate. And determining risk is not limited to your behavior on your existing card. If you miss a payment with another lender, that could lead to an increase on all of your credit cards.
After 12 months, they can increase your rate for almost any reason. But the increased rate only applies to future purchases, and they need to give you 45 days notice.
Credit cards are incredibly expensive ways to borrow money. If you use a card, your goal should be to pay off the balance in full every month. Then, the interest rate doesn't matter.
Bottom line: If you do have debt, you should never be paying the purchase APR. Look for a balance transfer, or get a personal loan to cut your interest rate. And take a long hard look at your spending to put more money towards paying off that debt.
No, they are not.
There is a big difference between a 0% balance transfer (where the interest is waived during the promotional period, discussed above) and 0% purchase financing offered at many stores (where the interest is only deferred).
I regularly encourage people to use balance transfers to help them pay off their debt faster. With a balance transfer, interest is switched off or reduced during the promotional period. Once the promotional period is over, interest starts to accrue on a go-forward basis. This can take years off your debt repayment.
But stores offer 0 percent financing at the checkout. With a lot of these programs, interest is charged from the purchase date if you do not pay off the balance in full during the promotional period. So, if you have a 12-month 0 percent offer -– and do not pay off the balance in 12 months -– then in month 13 you will be charged a full 13 months of interest. They retroactively charge interest, and it will be like you never had a 0 percent offer at all.
This is a common practice. Online, Apple (AAPL) does this, via their partnership with Barclaycard (BCS).
Bottom line: I don't like deferred interest deals. Most people do not understand the difference between waived and deferred interest, and this practice feels deceptive. If you take one of these offers, make sure you pay off the balance in full before the promotion expires.
Credit card companies have different rates for different types of transactions. The interest rate charged on a purchase (high) is different from a balance transfer APR (low).
Before the CARD Act, banks would apply your payment to the lowest APR balance first. Imagine you have a $1,000 balance. $500 is at 0 percent (balance transfer), and the other $500 is at 18 percent (purchase). If you make a $100 payment, banks would apply that to the balance transfer. That way, they reduce the balance transfer (at 0 percent) to $400, while protecting the $500 purchase balance (at 18 percent).
The CARD Act changed that. Banks now need to apply payments to the highest interest rate first. But this only applies to payments higher than the minimum due.
If you only pay the minimum due every month, your payment will still likely be applied to the lowest interest rate balance first.
Bottom line: You should never spend and have a balance transfer on the same credit card. Banks can only "trap" balances when you have multiple balance types on one card.
Not exactly true.
The CARD Act has stopped the handout of T-shirts on the steps of the school libraries, but they can still give sign-on bonuses. And they advertise on campus. For example, Citibank (C) has a "Thank You Preferred" card for college students. If you spend $500 in the first three months, you get 2,500 thank you points as a bonus. That is $25 of value.
Bottom line: I actually find this worse. Before, you got a free T-shirt just for signing up. Now, the credit card companies encourage spend on the card for the "free gift."
In the past, banks would charge you a fee if you went over your credit limit. Today, the CARD Act requires banks to receive your consent to charge an over-limit fee. So, in most cases, banks just eliminated those fees -- which is good news (kind of).
You can still go over your credit limit, if the bank approves your transaction. But the full amount by which you've exceeded your limit will be part of your minimum payment come the next bill, which could cause a payment shock.
More importantly, utilization (the percentage of your available credit that you use) is a big factor in your credit score. Your credit score determines the price you pay for credit. So, if you're over-limit on an account, you are considered riskier. That can result in the credit card company increasing your interest rate. And it could also result in other lenders increasing your rates with them. So you do pay, but it's an indirect cost.
Bottom line: We're glad the fee is gone, but you still need to be diligent and try to avoid going over your limit. If you pay your balance in full every month but are frequently bumping up against your credit limit, ask for a credit line increase.
I have heard from so many people that the way to eliminate overdraft fees is to opt out of overdraft protection. But it is impossible to completely opt out of overdraft.
Federal regulation requires consumers to opt into overdraft protection only for debit and ATM transactions.
But, the regulation does not cover checks and electronic transactions (including bill-pay and monthly direct debits, like gym memberships). The banks have all the power. If they approve the transaction, you would be charged an overdraft fee (typically $35 per transaction at banks and $25 at credit unions). If they decline the transaction, then you would be charged an NSF fee (non-sufficient funds), which is usually just as expensive as the overdraft fee.
Bottom line: You can't opt out of all overdraft fees. To avoid them, keep a buffer or find an account, like Ally, that doesn't charge those junk fees.
Not always true.
To be protected, you need to report the fraudulent transaction within 60 days. Otherwise, you give up a lot of your rights.
On ATM/debit cards, the bank can make you responsible for up to $500 of fraud if you report more than two days (but less than 60 days) after the transaction. On a credit card, you would never be liable for more than $50 (and most banks won't even hold you accountable for $50.)
One area where you will almost always lose is when your Personal Identification Number is used. If someone manages to get your PIN and takes money out of your account, then the bank will almost always assume that you authorized the transaction. Make sure you change your PIN often and never write it down.
Bottom line: Avoiding liability it your responsibility. Track your transactions regularly and call as soon as you detect any suspicious activity. And make sure you never share your PIN with anyone, or make it obvious.