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Young Consumers Relying Less on Credit Cards

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Seems the recession has brought out the more frugal side in younger Americans. The number of young consumers who rely on credit cards is at a new low. In 2007, before the recession, 8 percent of young Americans – the 18 to 29 year old set – had no credit cards at all. At the end of 2012, that number was 16 percent.

That’s good news for those consumers who are better at keeping credit cards out of the equation; however, it’s not such good news for the credit card companies and banks. Not only that, but of those in that age group that do use credit cards, the average credit card debt has dropped from around $3,070 to $2,087.

So if they’re not using credit cards, then what do these younger Americans opt for? Prepaid cards are the better choice for many and the marketing dollars in the financial sector these days are being spent on singing the praises of these financial products, according to John Ulzheimer, a financial analyst,

(T)here has been very aggressive marketing of prepaid debit cards over the past few years targeting young people and minorities.

He says it surprises him little that younger Americans are choosing debit over credit.

Young Consumers’ Debt Loads

It’s true that older Americans are also carrying less debt and much of it is in their credit card debt; however, they’re also adding to their automobile and mortgage debt. Because of that, in the 40 and older sect, their scores have dropped on average 1.8 percent as their DTIs have shifted. And one interesting finding has to do with the debt older consumers are shouldering for younger adults. That one big debt load, of course, is student loans. It’s another reason why younger credit scores are more impressive that those that have been maturing for decades.

The 2009 CARD Act is also playing a role. You may remember the clause that now requires consumers under the age of 21 to have a co-signer or at a minimum, the income needed to support the debt. It’s provided a bit of complication for some and as a result, this is another reason why prepaid cards are the first choice for so many.

Some parents might even have one source of credit card debt on their credit reports and that could be where they’ve co-signed for their kids who are jumping into the American credit system as young consumers. Here’s an interesting dynamic, though: a 20 year old can’t get a credit card without a co-signer or having to jump through hoops to satisfy tough lending requirements but qualifying for a mortgage, while one must still satisfy a number of requirements, isn’t as difficult. It’s an interesting quagmire for young consumers.

Employment

The jobs market is playing a massive role as well in this new shift away from traditional credit for young consumers. In 2008, when the recession first kicked in, and through current day, the U.S. economy lost 8.8 million jobs. Only 6.1 million have been regained. The population continues to grow and many job seekers have simply walked away from the job search. Only 58 percent of adult Americans have jobs, the lowest it’s been since 1983.

Strong Money Management or Desperate Times?

Which brings us to another dynamic: many college students are moving back home with their parents following graduation. This is another reason why older Americans are shouldering more debt. For those parents who didn’t shoulder the college loan debt, and instead, their kids did, they too are more likely to have their college students back home.

Generational Shifts

It’s an interesting dynamic that won’t be able to sustain itself for long. Adult kids living with parents, jobs scarcity, a shift in the debt load – a number of these facts will likely change the horizon of the American credit sector. What’s most interesting is two decades ago, it was a completely different image.

Older Americans were shedding their debt as they planned for retirement. Younger adults were entering a robust job market and were putting their college degrees to good use. If there was any kind of nuclear family dynamic, it usually included the parents moving with their grown children, not the other way around. Young consumers were the ones taking on credit card debt and making payments on student loans.

Overspending wasn’t as big of a problem, nor was massive credit card debt. Economic times were tough at different stages – including the recessions. So what makes this any different? For one thing, the world economy is anything but stable and while the American economy has historically been the model other countries look to, that’s no longer the case. The banks, two decades ago, were trusted institutions. Lawsuits and massive fines levied against them were unheard of. There was a mutual trust and respect. Those days, however, are long gone.

Young consumers simply aren’t in the same environment as their parents were. These days, not only do they not trust their banks, they don’t trust the media and they don’t trust the government. The question is, can all of these dynamics come together to result in the kind of changes we’re beginning to see emerge? The short answer is yes. In fact, lesser goings-on have resulted in even bigger societal shifts.

Ultimately, though, a society must have financial resources that only those banks can provide. Whether it comes sooner rather than later will be determined by which side caves first: the banks that are worthless without customers or the consumers who find buying houses and cars impossible without bank backing. The fact that jobs are hard to come by, saving is near impossible at this point and the lack of other options (the one difference being prepaid cards over traditional credit cards). Time will tell, but despite the obstacles young consumers face today, you can be sure they’re far more savvy because of that leery distrust.

What do you think? Are those young consumers on to something or is this a temporary flub that will work itself out so that the “same old, same old” can reign supreme yet again?

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