Have Millennials Sworn Off Credit Cards?

If the latest data from The New York Fed is correct, credit card use has been exploding in the United States of late — a fact that is notable in and of itself given the multi-year hiatus from credit card debt many Americans took (voluntarily or otherwise) in the aftermath of the financial crisis.

However, the recent blossoming in credit card debt is notable for at least two other reasons. The first is who is borrowing at an increased rate: subprime borrowers. As many pundits have written, this is either a positive trend indicative of economic recovery, or a worrying trend indicative of the next coming shock to the global economic system. On a recent episode of “Last Week Tonight,” John Oliver wondered whether the sudden boom in subprime auto lending is something like a gold rush for those who want to prey on low-income borrowers (mostly it isn’t).

The second notable point is who isn’t borrowing — which according to the Federal Reserve seems to be Millennials as a generation.

“I don’t want to use a credit card irresponsibly, and because of that, it’s scarier to use,” 23-year-old Rebecca Liebman told the New York Times of her reluctance to take on even a single credit card. “I grew up — I saw 2008 — I saw my dad get laid off. I don’t trust the financial market.”

So are Millennials the generation that just doesn’t want to borrow? Did coming of age in the shadow of a credit crunch leave the lot feeling like Ms. Liebman? It’s harder to answer that question than it might seem. Millennials might be thinking about debt and financial management differently from previous generations. But it’s also possible that Millennials are actually pretty similar to their parents and siblings, but running on a delayed timeline that makes them seem more different than they are.

Or maybe they’re just living in their parents’ basements and have no need for credit – Mom and Dad work just fine.

Generation Save

Growing up in the immediate aftermath of the financial meltdown had definite and calculable effects on how Millennials use money and credit products as they grow into adulthood.

Only 37 percent of American households headed by someone 35 and under held credit card debt as of 2013 (the most recent year data is available for) according to the Federal Reserve’s Survey of Consumer Finances. According to a New York Times analysis of the data over the 24 years the Fed has been measuring it, that represents the lowest level of debt for under-35 consumers since data collection began in 1989. It is also an approximately 25 percent decline from pre-financial crisis levels for the same age cohort.

Separate data shows that those Millennial credit users — or non-users, as the case may be — are also saving more aggressively than their older siblings and parents. A Bankrate survey from earlier this year found that 62 percent of adults ages 18 to 29 save at least 5 percent of their income. By comparison, about half of adults 30 and older save at the same rate. Among adults over 55, about half have no retirement savings at all.

“I don’t want to go out and buy, buy, buy, even though that’s what society wants me to do,” 32-year-old credit card cutter Jason Towner told the Times. “I want to save and invest for the long term.”

And Towner isn’t exactly a financial slouch — he works for a private equity and has had credit cards until as recently as 2010. He just decided in the aftermath that if he didn’t have the money in his account he didn’t really need to buy something.

“I was seeing what was happening around the world, and what was happening in my backyard, and I was thinking, ‘This is not a great idea,’” Towner said.

As the experts see the data roll in showing declining credit card debt among Millennials, the consensus is developing that perhaps members of this generation are not interested in the same way as members of previous ones were in expanding their buying power through debt.

“It’s pretty clear that young people are not interested in becoming indebted in the way that their parents are or were,” noted David Robertson, the publisher of The Nilson Report.

Nevertheless, that doesn’t mean they aren’t indebted right now — or that they won’t soon become more so in the future.

Generation Later

This generation of potential borrowers is not unusual merely because of their temporal relationship to the financial crisis. They are also carrying historic levels of student loan debt. Americans under 35 now have an average of $17,200 of student debt, 182 percent more than Americans of the same age had in 1995, according to the Federal Reserve’s data. Underwriting requirements for credit cards have also changed since the financial crisis. Income verification requirements put a near halt to card companies’ business of giving cards to college students without income, and the jobs slowdown left many Millennials unable to document income sufficient for a credit card until recently.

Student loan debt has also put a crunch on savings. Millennials save somewhat better than Boomers or Gen-Xers, but still less than what experts estimate they ought to do to appropriately fund retirement. That lack of funding is largely attributed to student loan debt service.

Student loans have also been a large factor in explaining why Millennials haven’t been buying houses. Some theorized that Millennials, scared off by the waves of foreclosures they remembered from childhood, would always prefer to rent. Numbers bear that out — as of early this summer, Millennial home ownership actually declined, according to the Census Bureau.

But that trend seems to be turning, especially among older Millennials. Fannie Mae’s data sees the home purchasing trend picking up. As Millennials shed student debt, get married and have children, they are seeking mortgages.

If that trend continues for another six months, it might be worth rechecking that data on Millennials’ credit card usage. It is possible, as the Times suggests, that with the proliferation of real-time digital payments services linked directly to their bank accounts, Millennials will find it easier to forswear debt.

But they might find that as refrigerators break, gas prices go up, children need soccer cleats and mortgages need underwriting and refinancing, credit cards are useful — so useful, in fact, that their parents and older siblings flocked to them once they entered the world of home ownership, with its wondrous unexpected costs.

Stay tuned: how Millennials act over the next five years will determine a lot about the future of what finances are considered mainstream.