Rising rates, bigger card balances cripple millennials’ home buying ability

New study shows young adults struggle to round up cash for down payments

Kelly Dilworth
Personal finance writer
Specializing in new trends in credit

Rising rates, high card balances cripple millennials' home buying ability

As aging millennials start families and get settled in their careers, many are itching to buy their first homes. But as interest rates rise and millennials’ credit card balances get steeper, many are finding it next-to-impossible to save up enough money to afford them. 

According to Bank of America’s latest Homebuyer Insights Report, millennials’ interest in homeownership has spiked in recent years. For example, 72 percent of millennials between the ages of 23 and 40 say they value homeownership and rate it as a “top priority.” Some millennials even appear to be more eager to buy a home than they are to get married, have kids or travel the globe. 

But despite a desire to own a home of their own, many 20- and 30-somethings are having a hard time scratching up enough cash for a sizable down payment. 

Nearly half of the millennials surveyed – 44 percent – said they hadn’t bought a home yet because they didn’t have enough cash saved up. Meanwhile, nearly a quarter of millennials say they can’t afford the kind of home they want, or their ideal location.  

Now, as the Federal Reserve continues to hike interest rates, millennials are confronting another thorny problem that makes homeownership feel all but out of reach for them: increasingly expensive loans. Not only are mortgage rates getting steeper, so are other variable rate loans, including credit cards and personal loans. That, in turn, is crowding out millennials’ ability to save money for a home – particularly since a growing number of young people are carrying hefty balances. 

See related: Young adults shouldn't wait too long to get started with credit 

Millennials are letting their balances grow

Once known for their skepticism toward credit and frugalness in the wake of the Great Recession, many older millennials have embraced credit cards in recent years. For example, a 2018 study from Northwestern Mutual found that credit card debt has surpassed student loan debt as a leading source of debt for millennials. 

Meanwhile, an NBC News GenForward survey found that nearly half of millennials – 46 percent – carry at least some credit card debt. A separate survey conducted by the Aite Group also found that millennials are more likely than other age groups to carry a balance – putting them on the hook for substantial interest payments. 

That willingness to carry debt has made millennials more vulnerable to big interest rate changes – particularly since a number of millennials are carrying relatively large balances. According to Experian’s latest State of Credit report, for example, millennials between the ages of 23 and 36 carry an average of $4,315 on their cards. 

Such a big balance can translate into hefty interest payments – especially if millennials only pay the minimum amount due. 

Rising rates are fattening millennials’ balances 

According to the CreditCards.com Weekly Rate Report, the average minimum card APR has climbed above 17 percent in recent weeks – thanks in part to the ongoing rate hikes from the Fed. Meanwhile, the average maximum card APR – which is closer to what many millennials with thin credit histories are paying – is near 25 percent. 

Such high numbers are making it pricey to carry a balance. If a millennial carries $4,000 on a card with a 20 percent APR, for example, and only pays the minimum amount due, they’ll owe more than $5,600 in interest charges alone – an amount that could have gone a long way toward a down payment. 

If millennials continue holding onto card debt, their interest payments could get even steeper. The Fed has signaled that it plans to keep hiking rates over the next year. That could lead to balances rising by up to a percentage point or more – an amount large enough to add hundreds of dollars to people’s bills. 

For example, if a millennial with a $4,000 balance saw their card APR rise from 20 percent to 21 percent, they’d owe an extra $307 in interest if they only paid the minimum amount due. 

See related: How many credit cards do you need to get a mortgage?

Lesson learned: Pay down debt before rates get higher

The ongoing rate hikes underscore just how important it is for millennials to pay down their debts now, before loans get even more expensive. 

If you’re hoping to buy a home in the near future, take a closer look at your debt payoff strategy and make sure you’re paying down high interest debt as aggressively as you can. 

You otherwise could find yourself in the same position that many millennials are in right now: too financially squeezed to afford a down payment any time soon. 


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Updated: 11-15-2018