Say what you want about millennials, but they seem to be making wise decisions when it comes to credit cards. A new survey finds that the majority of millennials are avoiding credit cards. A study commissioned by Bankrate and compiled by Princeton Survey Associates International revealed that 63 percent of adults 18 to 29 don’t have a credit card.
If millennials are indeed avoiding credit cards, many will urge them to reconsider. Today, it’s extremely common for family, friends, blogs, and banks to advise young adults to apply for credit cards.
While often accompanied with good intentions, encouragement toward credit cards may not be the best path forward for young adults. Millenials can thrive financially without ever using a credit card. Credit cards aren’t as essential as we think they are. The most popular arguments for credit cards are building your credit score, establish a credit history, reward points, and emergencies. But there are alternative ways to accomplish all of these things without credit cards.
“Credit cards are essential for building your credit score.”
Credit cards are a way to build credit, but they may not be the best way. There are alternative ways to increase your credit score and establish a credit history. One example is borrowing against an existing savings account or CD. Let’s say you have $500-$1000 of expendable cash in savings. You could go to your local bank and ask to borrow against what you have. The bank will freeze the money you have in your savings and then write you a check for that same amount.
Next, deposit the check into your savings. Ask the bank to set up an automatic withdrawal from your savings account and pay the loan back over the course of a year. You accomplish the same thing (increasing your credit score and establishing a credit history) without taking the chance of creating a credit card balance you can’t pay.
You’ll still have to pay interest and a small fee, but this is minor compared to the risk associated with revolving credit card debt. Furthermore, this is a great way for a young adult to learn the invaluable discipline of saving and establish a relationship with their bank.
“Rewards points are an excellent way to get ‘free stuff.’”
Everyone loves free stuff but using credit cards for points is risky. Credit card points are free for the self-controlled and expensive for the impulsive and undisciplined. Credit card companies know that impulsive consumers abound, which is why they rarely lose money from all of the “free stuff” they give away.
The New York Times interviewed a 25-year-old marketer who uses her credit card to rack up on airline points. Though she never carries a balance from month to month, it is evident her habits have disadvantages,
Time magazines piled up around her apartment and gathered dust after she bought a subscription simply because it came with an offer for extra points. And she has increased the amount of time she spends shopping on the Internet because merchants offer incentives online for cardholders that are not available in stores.
The same article goes on to note that “economic and social science research suggests that consumers tend to spend more using plastic than they ever would with actual cash.”
We buy what we don’t need and justify it because we are getting points. We feel less guilt when we splurge with a credit card than when we spend cash. The reward of points eases our conscious concerning our frivolous spending. As the saying goes, nothing is free in life. Everything comes with a price. At the end of the day, the “free” plane ticket isn’t free after all.
“Credit Cards are great to have for ‘emergencies.’”
Emergencies can happen to anyone at anytime. Whether it’s job loss, an unexpected trip to the hospital, car repairs, or a major home repair, there is no limit on how much an emergency will cost. Many promote using credit cards for emergencies as responsible and reasonable. But there are flaws in this logic.
If you know you have a credit card for emergencies, you lose motivation to save money and build an emergency fund. The money you should have saved becomes money blown on things you don’t need. It’s more appealing to spend extra money instead of saving it for emergencies, especially if you know you have a credit card for those emergencies.
Furthermore, you’re placing yourself at risk of paying more than you would have paid if you had used cash. A $3,000 emergency on a credit card with a 25% interest rate can quickly get out of hand. Now your revolving debt is a new emergency.
Finally, inconveniences become emergencies. When I was in college, I had an awful lot of so-called “emergencies.” Hunger pangs became emergencies. Boredom became emergencies. It’s so easy to swipe for so-called emergencies today and forget that a bill is coming tomorrow.
The Exception, Not the Rule
Using a credit card for the purposes above and paying your card off every month works for some people, but they are the exception, not the rule. How do I know this? In our office, we like to say, “Follow the money.”
Have you ever wondered how creditors make so much money? They have overhead costs and employees they have to pay — not to mention the free stuff. If the majority of people used credit cards correctly, creditors would close their businesses. The reason they aren’t losing money is that they know most people don’t use credit cards responsibly. Most Americans carry a balance forward each month, and creditors earn 22-27% on that money. Or we buy things we don’t need. Both benefit credit card companies.
The next time you give or receive advice about credit cards, consider the risk involved. There are safer alternatives for millennials and anyone else pursuing financial security besides credit cards.