Millennials now represent the generation that accounts for the largest share of the U.S. population, and they are one of the biggest forces behind today’s economy. They have tremendous buying power, estimated at around half a trillion dollars. Credit cards can offer them lots of benefits, and help them put that buying power to work in more convenient and rewarding ways – as long as they avoid the major pitfalls that so many Millennials make when it comes to credit cards.
Not Carrying One
Unfortunately, Millennials also report that they have difficulty getting credit and securing loans, and nearly 75% of them feel that they do not get sufficient support from banks. Many don’t even try to deal with banks. Millennials are America’s most “unbanked” generation, which means that high numbers of Millennials do not have a regular bank account of any kind. They also use credit cards less than other generations. They prefer to instead rely on prepaid cards – which can be a great tool and are accepted where credit cards are honored. But prepaid cards do not offer the same cardholder privileges and benefits. Here’s one quick example. If you try to rent an automobile, the rental agency will require a credit card. You can show them a prepaid card, but that will not be sufficient. Not carrying a full-fledged credit card may be the biggest credit card mistake that Millennials make.
Not Building Credit History
By not taking advantage of this financial tool they deprive themselves of many perks, as well as one of the easiest and best ways to build up a credit history and raise one’s credit score. According to information from FICO, the leader in credit score calculations, approximately 35% of your credit score is based on your payment history. But if you don’t have a credit card you may not have any payment history – which works against you. Another 15% or so of the calculation is based on the length of your credit history, so delaying the process of becoming a credit card holder could continue to adversely impact your FICO score.
Just because you carry a credit card does not mean you have to use it or carry a balance. But if you do use one occasionally, and then repay the balance before it comes due, that responsible cardholder behavior gets directly reported to all of the major credit reporting agencies. That can boost your credit profile and credit score and make it less expensive and easier to borrow for everything from car loans to student loans. Potential employers also check your credit – and if you have a solid credit history they may be more inclined to hire you. But it will only happen if you first decide to apply for and carry a credit card – something that a great number of Millennials do not do.
Not Enjoying Special Card Protection
Credit cards are also safer to use than an ATM card for those Millennials who do have bank accounts, because federal laws place strict limits on how much cardholders are liable for if they incur a loss due to theft or other fraudulent use. You don’t enjoy those same protections with an ATM card. In an emergency a credit card can also provide a much-needed safety net, too, so that if necessary the cardholder can deal with a financial emergency and the pay the debt off over time. Otherwise consumers often fall prey to Pay Day lenders – who typically charge outrageously high rates of interest. Many Pay Day lenders, for example, have had charges brought against them by the federal government and by office of the Attorney General in many states, because they have been caught engaging in predatory lending practices that are illegal.
Carrying the Wrong Kind of Credit Card
Those who avoid that first big mistake and do carry a credit card may make another misstep, though, by carrying the wrong kind for their particular needs and financial situation. If you are a student, for instance, it may pay to look into some of the credit cards that are designed with features especially geared toward students. These cards typically have no annual fee, a low APR, and perks such as cash back for categories that are popular with students – like pizza restaurants or iTunes. Discover Card even offers a student card that rewards cardholders with $20 for every year that they earn a GPA of 3.0 or higher – and that offer stands for up to five years.
Over the past five years Millennials have launched almost 160,000 startups per month, and about 30% of all entrepreneurs are 20 to 34 years old. If you’re a Millennial small business owner but are not carrying a business credit card, you could also be missing out on features that will help you run your business. Business credit cards offer ways to track business expenses, do a more efficient job of managing purchases that employees make on behalf of the company, and streamline accounting and tax filing. Similarly, if you commute by car every day but don’t have a gasoline rewards card, you could be carrying the wrong card.
There are also cards that give robust cash back rewards to grocery shoppers or people who pay their credit card balances on time each month. Are you planning a trip to Disney World? Do you want to earn rewards that can be redeemed for concert tickets, or to help you pay less when you shop online? There’s a reward card for each of those specific categories of interest, too. The point is that it is a good idea to do some research to determine what cards there are out there that may be closely aligned with your lifestyle and spending patterns.
Paying Too Much for One
Many consumers have difficulty understanding the nuts and bolts of how credit cards work, so they don’t realize how much interest they are paying, what fees might be charged for doing a balance transfer, and whether or not their card carries an annual membership fee. There are also many Millennial cardholders who are paying way too much interest because they are stuck with a card that has an exorbitant APR or annual percentage rate. That’s why it is always wise to keep tabs on what is happening in the credit card marketplace, because new cards are becoming available all the time, and you may qualify for one that is less expensive to use. Interest rates charged by card companies also change from time to time, and although your credit card company is required by law to notify you ahead of such changes, it is smart to keep an eye on those rates. That way if yours begins to rise you can shop around and try to find a more affordable card to carry.
Canceling Credit Cards
As strange as it may sound, especially to members of the Millennial generation who grew up with a keen understanding of how dangerous unmanageable debt can be, canceling credit cards is one of the biggest credit card mistakes that Millennials make. This may sound counterintuitive, since cutting up your credit cards may seem like the most drastic way to lower your debt. But while paying off your plastic is a great idea, canceling credit cards after eliminating those balances can actually take a toll on your credit. It goes back to the way FICO scores are calculated, based on your history of making payments and using credit cards in a responsible fashion. If you close those accounts, they no longer factor into your credit history. But hold on to those cards that no longer have a balance due, rather than closing the accounts, and each month the credit card company will continue to report to the credit reporting agencies that you have an open line of credit and do not owe any money on it.
Not carrying a balance, while still having credit available, gives you a high rating in terms of what credit card companies call your Credit Utilization Rate. That is essentially a calculation of what percentage of the credit available to you is actually being used. The greater the percentage, the weaker it makes your credit look. But when you lose a low portion of available credit – or don’t use any of it but still have it offered to you in the form of an open and active credit card account – that strengthens your credit profile. So by all means, pay off those nagging credit card balances. But don’t close the account. Keep it open. Use it only once in a while for a very small purchase, and then pay off that balance ASAP. That strategy will help raise your credit score, but you will still have your credit card to rely on if you need it for added security when making purchases, for an emergency backup plan, or for other purposes that require a credit card – such as renting an automobile.
The Bottom Line
The right credit card can give you convenience and peace of mind. Plus the potential for purchase rewards, cash back, and cardholder benefits that many cards provide that include such things as car rental insurance coverage, purchase warranty protections, roadside assistance, merchant dispute assistance, and concierge-style services for making reservations or planning a trip. Just avoid these credit card mistakes that are commonly made by Millennials, while also using your credit cards in commonsense, responsible ways. That way you’ll have the handy power of a dependable financial tool that can actually help you establish and strengthen your credit.