Credit cards may not be as trendy as they used to be, according to an analysis by FICO.
The credit scorer’s data show that 16% of people aged 18 to 29 had no credit cards in 2012, up from 9% in 2005. As a result of lower credit usage, Generation Y’s average outstanding credit card debt was $2,087 last year, down 32% from a $3,073 average for young people in 2007.
Why Do Millennials Have Less Credit Card Debt?
This sudden drop can be partially explained by the Credit Card Accountability Responsibility and Disclosure Act. This law, passed in 2009, made it more difficult for borrowers under 21 to obtain a credit card.
The poor economy and job market also changed younger consumers’ overall attitude toward credit cards. Frederic Huynh, a senior principal scientist at FICO who oversaw the research, told The New York Times that “it stands to reason that the Great Recession has influenced, to a certain degree, consumer credit behavior as well.”
This apprehension toward credit could have dire consequences for these young consumers. They may not be able to build credit as quickly, since using plastic wisely is the fastest way to demonstrate a borrower’s creditworthiness. Although Huynh said that cards are “influential and critical” to evaluate credit risk, there are other ways for Millennials to build credit.
Despite ditching credit cards, Gen Y has no problem racking up student loan debt, which has grown from $6,500 in 2007 to $11,500 in 2012. Student loan debt is the only kind of debt that has increased for this group over the past five years, Huynh says.
Millennials may believe student loans are preferable to credit card debt, but each has its drawbacks. Whatever kind of debt you may face, it is important to have a plan to pay it off.