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Millennials, money management and credit cards

by Peter Andrew

If you don't know what a "millennial" is, you probably aren't one. But you're almost certain to know -- and quite probably love -- one. The word is simply shorthand for someone in the age group 18-34 years. Confusingly, some use the word to describe slightly different age ranges, but if you think of millennials as young adults you won't go too far wrong. The world changes, and each generation faces its own unique problems, but the financial ones facing young people today are exceptionally challenging.

A financial education deficit

Unfortunately, many younger millennials are facing those challenges without the knowledge necessary to make informed choices. As recently as 2008, a Jump$tart survey found, "The financial literacy of high school students has fallen to its lowest level ever." True, college students did much better in those tests, but the report's author noted that only 25 percent of Americans were graduating college at that time. So close to three in four Americans entering adulthood were effectively financially illiterate.

A much more recent study, jointly published on May 12, 2014, by the Consumer Federation of America (CFA) and VantageScore Solutions, found knowledge of credit scores among millennials way lower than that of older people. For example, when given a list of six types of organizations (landlords, cell phone service providers, credit card companies and so on) that might access a consumer's credit score before providing credit, goods or services, only 18 percent of millennials knew that all six were likely to do so. That compares with 32 percent of older consumers. Neither figure is cause for celebration, but the score for young adults is truly dire. Meanwhile just under one half of millennials had ever accessed their free credit report, while very nearly three in four older people had done so.

"Obtaining their free credit reports not only allows consumers to check the accuracy of the reports but also appears to motivate them to learn more about credit scores," observed CFA executive director Stephen Brobeck.

Student debt weighing heavy

College graduates may have higher levels of financial literacy, but many of them have a different problem: student loan debt. "Young Adults, Student Debt and Economic Well-Being," a new study published May 14, comes from the Pew Research Center. It shows that households headed by adults age under 40 who have student loan debt (now running at 37 percent of all households, a record high) find it much harder to accumulate wealth than those without that burden.

Young college-educated graduates who have this debt have an average household net worth of just $8,700. That compares very badly with similar graduates who are free of student loans: those who won scholarships, presumably, or whose costs were covered by mom and dad. They have accumulated on average seven times as much, or $64,700. Those in the same age group without a bachelor's degree and without student loan debt have an average household net worth of $10,900.

Overall indebtedness is also a big issue for households headed by college-educated under-40s with continuing student loans: They typically owe across all their debts $137,010, while the same figure for similar but student loan-free households is $73,250.

Youth unemployment

The good news for college graduates is that they have a lower unemployment rate than those with lesser educational qualifications. However, they weren't immune to the Great Recession, which saw graduate unemployment rates more than double between 2008 and 2010 to 8 percent from 3.1 percent. By 2010, the jobless rate for those without high school diplomas was running at 33 percent, according to USA Today.

By February 2014, some of those high rates were moderating, but the fact remains that many millennials find it hard to get work. That month, the true rate of unemployment among adults ages 18-29 was 15.8 percent, once you added in the estimated 1.952 million young adults who are not counted as unemployed in official headline figures, because they've given up on what they see as a hopeless search for jobs, according to the non-partisan Generation Opportunity organization.

The cost to the nation of this is immense: In a January 2014 report, Young Invincibles calculated "severely high youth unemployment costs $9 billion in tax revenue each year at the federal and state level." The cost to the individuals who are affected is incalculable.

Millennials making payments

With all the financial problems they face, it's perhaps no surprise that younger people choose different payment methods from those who are older. When the Federal Reserve Bank of San Francisco studied this, its report, published in April 2014, noted that the propensity to prefer using cash diminished with age, with 40 percent of those age 18-24 years and 31 percent of those 25-34 years choosing to pay this way. Millennials also preferred debit cards more often than those in their parents' and grandparents' generations did.

What they didn't choose to use were credit cards. Just 7 percent of those 18-24 years and 18 percent of those 25-34 years preferred that payment method. That contrasts with 33 percent of those 65 years or older. On balance, this is probably no bad thing. In the wrong hands (and it's hard to think of "wronger" hands than those belonging to someone who's financially illiterate), plastic can be dangerous.

However, there must be a significant group of responsible, financially literate millennials who are avoiding credit cards for the wrong reasons. Of course, they're right to be wary of them, but such plastic can deliver unique consumer protections, perks and privileges. And rewards credit cards can provide genuinely valuable miles, points and cash back.

Of course, millennials as a group have enough financial problems on their plates without adding unmanageable credit card debt. But if you know ones who are responsible, and who are going to pay down their balances in full every month, then it could be worth mentioning to them that they might be missing out. Let's face it, they need all the help they can get.

Published 05/19/14


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