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The Pros and Cons of Avoiding Credit Cards

Millennials are far more likely than older adults to make do without credit cards.

More than 60 percent of millennials – defined as those age 18 to 29 – said they did not have a single major credit card, according to a survey published this week by Bankrate.com. In contrast, 35 percent of adults over 30 said they had no cards. (For the survey, Princeton Survey Research Associates International interviewed 1,161 people by telephone in late July and early August. The margin of sampling error is plus or minus 3 percentage points.)

The disparity may be partly because the Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly known as the CARD Act. The law, aimed in part at restricting the marketing of credit cards to college students, made it tougher for those under 21 to qualify for credit cards. The proportion of students holding credit cards dropped to about a third of students last year, down from about half in 2004, according to research cited by the Government Accountability Office. The report also noted that two-thirds of college students said they feared
getting into credit card debt.

Other factors are at play as well. Younger adults already burdened with student loans may want to avoid the temptation of adding even more debt. And some millennials may not be cardless by choice, said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling. They may simply lack the ability to qualify for one if they’ve had difficulty getting a job and don’t have a steady income, or they may have tarnished credit because they previously got in over their heads with card debt. Being “judicious” about using credit cards, then, can make sense for some millennials. “Getting their financial feet on the ground before they begin pulling out the plastic could benefit them in the long run,” she said in an email.

Ellie Cary, 22, a recent graduate of Austin College in Sherman, Tex., said she had no credit cards by choice and did not want any. She is wary, in part, from watching a roommate run up bills on a Victoria’s Secret store card. “When you’re 20 years old, it sounds so glamorous to think, I can pay it off later,” she said in a phone interview.

She majored in art with a minor in media studies and has about $3,500 in student loans – much less than some of her friends, she said, but still an obligation that weighs on her. She works part time doing graphics and marketing work for a credit counseling agency in Dallas and gets by with some help from her parents. She’s careful about paying her bills on time and uses a debit card for purchases.”For me,” she said, “credit cards feel like borrowed money.”

That attitude may be wise, as the survey also showed that millennials were more likely than other age groups to carry a balance on credit cards and were also more likely to miss payments or pay late.

Yet, there also can be a downside to avoiding credit cards entirely. “It’s not necessarily a good thing,” said Jean Chatzky, a contributing editor at Bankrate. Young adults with little or no credit history have what’s known as a “thin” credit file, which can make it difficult to obtain a loan on their own for larger purchases, like a car, when the time comes. Creditors like banks and credit card companies report a person’s borrowing habits to credit bureaus, which create reports reflecting credit use and payment history over time. Other lenders use the report to decide whether someone is creditworthy.

“It’s hard to underwrite an applicant who has no credit history or credit score,” said John Ulzheimer, a credit expert for Credit Sesame. You might end up paying a higher interest rate, or even have your application declined, he said.

Rod Griffin, director of public education at Experian, one of the major credit reporting bureaus, suggests that a prudent step is to apply for a single card and use it periodically for small purchases. Making card payments on time helps create a positive credit report that make borrowing in larger amounts easier .

Here are some questions about establishing credit:

Should I request a card with a low credit limit to help prevent overspending?

Asking for a very low credit limit may backfire, said Mr. Griffin. An important factor in your credit score – a three-digit number that summarizes your credit report – is the proportion of available credit that you use. If you have a low limit, it’s easier to reach it, which tends to lower your score.

Can my student loans appear on my credit report?

Yes, so making payments on time is critical, according to Mr. Griffin, because payment history is the most important factor in your credit score. While education debt can cause financial problems if it’s excessive, it can also can help build a credit history, if properly managed. A new analysis by Experian found that 13 million consumers age 18 to 34 have at least one open student loan, and their average VantageScore (a competitor to the FICO credit score) was 640, or 20 points higher than the average for that age group over all.

What if I’m under 21 and want a credit card?

The CARD Act generally requires people under 21 to show they can pay their bills independently, or have someone who can co-sign the application. Ms. Chatzky said that as an alternative, parents might be able to add a child to their own credit card account as an “authorized user.” The parent pays the monthly bill, to be sure it’s paid on time, and the child benefits from a positive payment history.

Contact either Jay or Patrick for more information or assistance with your credit file issues.

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