Many Americans wouldn't think of going shopping without some plastic lining their wallets. But young folks today seem to have fallen out of love with credit cards. Millennials, those aged between 15 and 35-years-old, hold fewer credit cards than any other generation of Americans.
Well, the millennials are not alone in lightening up on the plastic. Since 2008, older Americans have also jettisoned some of their credit cards as many lost their taste for debt. This coincided with a tightening up of credit that made it harder and more expensive for consumers with low credit scores to obtain credit cards.
But it's the millennials who had the biggest percentage drop in credit card use. David Robertson, the publisher of The Nilson Report, observes that younger consumers are avoiding the debt that their parents embraced.
This reluctance can have lasting effects for the millennials. By avoiding credit card use, younger consumers are not developing any level of comfort with debt nor are they establishing a robust credit history. For better or worse, millennials are not financing large purchases, and this may make it harder for them to take out home mortgages later on.
The American public has recently been increasing its use of credit cards. U.S. household debt is up 0.3 percent, or $35 billion, to $12.29 trillion in Quarter 2 of 2016 versus the previous quarter, according the New York Fed. The rise is attributed to climbing auto loans and credit card use. According to the banks, credit card operations are running at full speed and the number of delinquent card users is hitting record lows.
One factor that may be depressing millennials' use of credit cards is the exploding level of student debt that leaves less money left over for them to make large purchases. Folks with tens of thousands in student loans might be too gun-shy to incur any new debt. After all, 2 in 3 parents can only pay part of their children's tuition and they themselves are often in debt.
Other may have seen friends and families lose their businesses in the Great Recession when banks cut off their credit lines. All of these factors seem to have instilled a sense of patience among the millennials who would rather pay with cash than take on any form of debt.
Subprime borrowers have been returning to the credit card market in the last couple of years as financial institutions loosened credit standards. Nonetheless, millennials still depend on their checking accounts, via debit cards and mobile apps like Venmo, to pay for a pack of gum or a trip to Europe.
The millennial effect could have negative effects on the U.S. economy. Credit cards help fuel consumer buying, the backbone of the American economy. It takes longer to purchase, say, a washing machine if you insist on paying with cash.
Scant credit histories might also interfere with the home-buying plans of millennials, which means they might not need that washing machine any time soon. On the plus side, the new credit sobriety might mean that millennials will be able to save and invest more for their retirements, certainly an admirable accomplishment.