What millennials can teach us about credit
They're debt-averse initially, but they are savvy about their credit and credit cards in later years
Expert on fraud, travel and debt.
A stack of student loans to be repaid, horror stories from family members who have racked up credit card bills and a general aversion to debt – all of this has left many millennials shying away from credit cards.
That doesn’t mean that millennials are lacking in financial knowledge. In many ways, millennials have much to teach us about how to manage our finances and credit wisely. Be frugal. Don’t charge what you can’t pay off every month. Build an emergency fund.
Here are some fiscal lessons learned from millennials:
‘We don’t buy anything until we have the money.’
“We don’t live beyond our means. That makes things less stressful for us,” Ayana Lage, a public relations specialist in Fort Lauderdale, Florida, says of herself and her husband.
For example, instead of pulling out the credit cards to pay for purchases, the 23-year-old newlywed says she and her husband rely on their debit cards. “We don’t buy anything until we have the money.”
That meant balancing their dinner plates on their laps for nine months while they saved up for a dining room table.
Lage’s hesitancy to use credit comes in part from warnings from her aunt, who opened credit cards while in college and “spent a lot of money shopping and wining and dining.” It’s a pattern Lage doesn’t want to repeat.
She and her husband recently broke down and got a credit card for traveling to avoid having hotels and rental car companies put a hold on their bank account.
Debit trumps credit for younger millennials.
A 2016 survey by TD Bank found that on average, Americans make $4,700 worth of purchases each year with their credit card, and just $2,400 with cash, checks or debit card. By comparison, millennials do the bulk of their spending – or $5,200 – using a debit card, check or cash, and make just $3,300 in credit card purchases.
That debit versus credit preference gets flipped as millennials age. Older millennials, age 25-34, are the most likely group to use credit cards, at 83 percent, versus the runner-up baby boomers at 78 percent, a 2016 FICO survey found.
Younger millennials often “don’t know it’s a good idea to have a credit card and use it,” says Samantha Gorelick, a 34-year-old wealth adviser at Heron Financial Group in New York. “It doesn’t have to be an either/or situation.”
Even something as simple as opening up a credit card and linking your Netflix account to it can help you build credit, Gorelick says.
Having a good credit history and credit score is important if you want to own a home or take out another type of loan, she says. The higher your score, the lower the interest rate you’ll get – which means you’ll pay less.
A young couple saves for a rainy day.
Chris Collier, an assistant manager of a recreational vehicle dealership in Pleasant Prairie, Wisconsin, is married with a new baby, and he and his wife have no credit cards. The couple recently paid off her auto loan, and now they are taking aim at his.
Collier is a big fan of financial guru Dave Ramsey, a credit card and debt foe. Rather than relying on credit, Collier aims to have $10,000 in an emergency fund. “Sometimes we dip into that and replenish it as needed,” he says.
While he realizes many millennials can’t afford to set $10,000 aside, “even $1,500 would handle most things.”
Main financial goal? ‘Being done with debt.’
Many millennials are grappling with student loans, which have taken a heavy toll. The average 2016 graduate has more than $37,000 in student loan debt, according to college financing expert Mark Kantrowitz.
Jared Termini, a 23-year-old television camera operator in Dallas, used both student loans and credit cards to cover his college costs because the loans weren’t enough to cover his full tuition at the University of North Texas. “I relied on credit cards primarily to get me through school.”
He began paying back his student loans in January, and since graduating in spring 2015, he has avoided using his credit card. “My main financial objective is paying it down and being done with debt,” he says.
“I want to be debt free and at the same time live somewhat comfortably.”
Credit has advantages when fraud strikes.
While younger millennials prefer to use debit cards for purchases, Sean Stein Smith, a member of the American Institute of CPAs’ financial literacy commission, urges caution.
If your credit card is lost or stolen, the Fair Credit Billing Act limits your liability to $50 (with some exceptions), and many credit card issuers also offer zero liability protection. But if your debit card is stolen, the thieves can drain your bank account, he says.
If you rely on a debit card, Smith suggests opening a separate bank account and putting a certain percentage of your paycheck there. That way if your debit card is snatched, there’s a limit how much the crooks can steal.
Another option is a prepaid card. “It limits the risk of your information being hacked and costing you all of your money,” Smith says.
Millennials use credit cards strategically.
Ashley Hulbert, a 31-year-old Tampa, Florida, resident who works in finance for a modeling agency, relies on two credit cards that earn cash rewards.
When she recently needed to cut back some bamboo in her yard, she bought a chain saw on HomeDepot.com. Through a special promotion, she earned 3 percent cash back by making the purchase online, rather than in the store.
Hulbert also will often redeem the cash back she has earned to purchase gift cards to give as Christmas gifts.
Sapphire Reserve wins over millennials.
Millennials, despite their credit cards hesitance, flocked to the Chase Sapphire Reserve card, which launched in 2016 with a steep $450 annual fee.
About 60 percent of Reserve cardholders are millennials, says Chase spokeswoman Amy Bonitatibus.
The big draw – the travel benefits. Cardholders spending $4,000 in the first three months receive 50,000 bonus points, worth $750 in travel, a $300 annual travel credit, triple points for travel purchases, and other perks. Extra points are earned even when using Airbnb and Uber.
“Millennials are very smart about their money and very smart about rewards,” Bonitatibus says. The card “rewards them for the way they live their life and the way they travel.”
Final thoughts: Use cards with care.
Millennials – and cardholders of any age – should be careful when considering adding the Reserve or any high-annual-fee travel credit card to their wallets, Gorelick warns.
“For a high net-worth individual who doesn’t have a problem with cash flow, absolutely go for it,” she says. “But if you’re tight on your cash flow, there are plenty of no-fee and low-fee credit cards that offer rewards.”
Smith offers another caution when using any credit card. “It’s awfully easy to use it over and over again and not realize how much money is going out the door.”
See related: Infographic: Credit card love from older millennials, How millennials answer Reserve's 100,000-point question, Millennials, now house hungry, struggle to build credit, Reward card reviews, No annual fee card reviews
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