Young adults are more reliant on credit cards than ever before
The countdown until the student loan payment pause is lifted in October is ticking, and some experts worry that once payments resume, many younger Americans will find it harder to dig themselves out of credit card debt.
About 53% of millennials and 41% of Gen Z respondents said they were more reliant on credit cards than ever before this summer, according to a recent study by Quicken Inc. The survey, which consisted of 1,002 credit cardholders in June, found that 38% were using credit cards to make ends meet.
Another 35% of Americans said they believed they would max out at least one of their credit cards by the end of the year, the study found, regardless of their income level.
The results are concerning, one expert said, especially with credit card interest rates hovering over 20%. The end of the pandemic-era student loan forbearance this fall could worsen the financial stability of younger adults.
“I’m troubled by the compounding problems facing this group," said Eric Dunn, CEO of Quicken. "Many of them are living paycheck to paycheck and relying on credit cards they may not be able to afford.”
'Millennials should be especially aware'
The number of credit card accounts grew by 5.48 million to 578.35 million in the second quarter, the Federal Reserve Bank of New York revealed this week. Outstanding credit balances hit $1.03 trillion, up 4.6% from the previous quarter, the highest level recorded in the series.
Just over a week ago, data from the Federal Reserve Bank of St. Louis also showed credit debt had topped $1 trillion.
“One trillion dollars in credit card debt is staggering,” LendingTree chief credit analyst Matt Schulz said in a statement. “Unfortunately, it is likely only going to keep growing from here.”
What’s troubling is how compared with other age groups, the youngest Americans are already having a harder time making payments on time.
For instance, 18- to 29-year-olds had the highest credit card delinquency rates in the second quarter, according to the NY Fed. At least 8.8% were 90-plus days behind on payments, up from 8.5% the previous quarter. This was followed by 30- to 39-year-olds who had a delinquency rate of 7%. The past-due rate for those 40 and over was below 5%.
The results mirrored what Quicken researchers found in June.
Almost half (49%) of millennials and 55% of those earning under $50,000 a year said they “didn’t see an end in sight,” as they lived paycheck to paycheck. Another 25% of those surveyed said they would need to cut back on spending because they were “currently buried in credit card debt,” Quicken found.
“Credit card interest rates are currently in double digits, and not uncommonly 20% or more, which is causing many young people to face a rising debt load,” Dunn told Yahoo Finance. “Millennials should be especially aware of this, as over half of them have significant credit card debt.”
'Age into financial independence'
Rising interest rates and stricter lending standards didn’t stop some Gen Z consumers from applying for credit cards this year – and piling on debt.
According to a separate study from TransUnion, Gen Z credit card balances grew to $55 billion in the second quarter, up from $36 billion a year prior. That represents a 51.9% year-over-year change. Overall, credit card balances grew to $963 billion in the second quarter.
Additionally, half of Gen Z borrowers planned to apply for new credit or refinance existing credit within the next year. That compares to 32% of the entire population, TransUnion noted. A year ago, only 41% of Gen Zers said they planned on applying for credit or refinance — a big difference.
One factor that’s pulling Americans to rely on credit card debt is inflation, according to Michele Raneri, vice president of US research and consulting at TransUnion.
“As members of the Gen Z demographic age into financial independence, and as credit [is] being made available to them for the first time, many are taking advantage of that newly available credit.” Raneri told Yahoo Finance. “Inflation and a higher cost of living likely have at least some of them turning to credit products as a way to manage their monthly budgets."
Student loan forbearance ends
With Biden’s student loan forbearance program set to end in October, some borrowers are feeling worried about how they’ll make ends meet.
Approximately 46% of borrowers said they weren’t financially prepared to resume payments, according to a study of 1,202 former college students with outstanding federal student loans conducted by US News & World Report in June.
Most notably, 85% of respondents believe they will face financial hardship due to student loan repayment. That’s why, according to Dunn, borrowers will have to act fast to avoid defaulting on other financial obligations.
Read more: Worried about when student loan repayments resume? These programs could help
One way to plan ahead is by considering the new income-driven repayment plan available from the Education Department.
At least 78% plan on applying for deferment or forbearance once student loan payments resume, US News noted. Some 83% plan on using other strategies to reduce payments, such as enrolling in an income-driven repayment (34%) or an extended repayment plan (23%).
Another option is the 12-month on-ramp program, which will protect borrowers from the “harshest consequences of late, missed, or partial payments,” the White House said.
“Young people are already facing an uphill battle when it comes to their finances — it’s not their parents’ financial environment by any means,” Dunn said. “Particularly since such a large number of young people have student loans to pay off, many, many people have a reason to be concerned.”
Gabriella Cruz-Martinez is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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