While many Americans continue to grapple with credit card debt, members of the millennial generation are taking on less debt than ever.
A recent study by credit score company FICO indicates that among those ages 18 to 29, credit card debt is down by nearly a third. They simply don’t want a credit card at all.
The trend began following the Great Recession of 2007, when banks and other financial institutions swung shut the door on easy credit. In fact, 29 percent of more than 1,000 respondents age 18 and older reported in a 2010 CreditCards.com survey that they did not own a credit card. That number was up by 10 percent from the company’s survey the previous year.
You can also blame an anemic job market and the high costs of student loans for the millennials’ new aversion to credit cards. Those keeping track of the situation compare these young people to those who grew up during the Great Depression and note that they have decided to view being frugal as hip.
With all this credit card defection, you may wonder whether or not it’s possible to live without a credit card. It turns out it is. However, as you might expect, there are pros and cons to existing off the plastic grid.
Why ditch credit cards altogether? Not having one makes it easier to be conscious of your spending–you’re using real money to make purchases and pay bills, instead of credit. It’s easier to live within your means when you can only spend what you earn.
Simply having a credit card makes incurring interest and fees more likely, as you usually have to actively use the card to build a good credit score from it. Without one, cash that might end up going towards interest and fees can be invested or put into a savings account.
Studies show that people who live on a cash-only basis save up to 20 percent more of their income than those who rely on credit cards. A 2012 study published in the Journal of Consumer Research reported that shoppers who pay cash focus on the cost of an item, while those who charge their purchases to credit cards focus more on the benefits of owning the item.
If you back up and look at the larger economic picture, a population less enslaved to credit card debt has more of its own cash to spend, which can only spur general economic growth.
Life is more difficult without credit cards because skipping plastic entirely makes establishing credit more challenging. After all, how will prospective landlords, lenders and even utility companies know if you have been fiscally responsible if you don’t have a credit report?
Not having a credit card can also make renting a car and booking hotels or flights virtually impossible. Though using a debit card is an option, hotels and car rental agencies in particular prefer credit cards for incidentals. Using a debit card almost always requires a hefty deposit or hold of several hundred bucks, which could lock up your funds or overdraw your account.
One way to establish credit and enjoy the convenience of a traditional credit card without incurring debt is to use a secured card. Most companies that offer such cards require you to put down a cash deposit to serve as collateral for the amount you borrow. So, if you want a $1,000 line of credit, you deposit $1,000. Every time you “borrow” with the card and repay, the cardholder will report to the three major credit bureaus. After you have drawn from that amount and repaid it a number of times, you will have established a positive track record, allowing you to switch to a conventional credit card if that is your goal.
But those millennials who have already gotten used to charging purchases to their credit cards, economists predict, will likely carry a balance until the day they die.