10 Mistakes Millennials Make With Credit Cards

Young Americans are having trouble with their finances. According to a survey conducted by NerdWallet, Millennials (consumers ages 18 to 34) are in need of a budgeting and credit refresher course. The survey states,

“Millennials have the lowest average credit score — 28.1% have scores below 579 — and the shortest credit history of all age groups, and it may not improve.”

Why are Millennials struggling with credit health? The root of the problem may lie with their approach to credit card use. NerdWallet’s data uncovered many Millennial credit blunders, including:

1. Opening new accounts with no purpose. While not a habit specific to Millennials, nearly half of this consumer group have applied for and opened credit accounts with no objective in mind. This behavior can lead to overspending and high balances, two catalysts of credit damage.
2. Driving up credit utilization with small purchases. Haphazard spending is synonymous with high credit utilization. For example, suppose Millennial Mike uses his credit card for small purchases like buying a sandwich at lunch, picking up the latest DVD at Best Buy, etc. Although these items are inexpensive individually, their sum quickly adds up to a balance Mike cannot afford at the end of the month. He is forced to make minimum payments and deal with the credit damage associated with a 45 percent utilization rate.
   
3. Being lured in by deals and perks. Millennials who applied for credit on a whim were usually influenced by promotional offers and perks like frequent flyer miles, cash back, shopping bonuses, etc. with no regard for annual fees and other hidden costs, two factors that can shift the scales when it comes to choosing the right credit card.
   
4. Applying for elite accounts with sub-par credit scores. High-end credit cards usually provide the best customer rewards, but Millennials are falling short in the application process. Most who apply do not have the required income or credit status to be approved. The result is an unnecessary credit inquiry and overall score damage.
5. Carrying a balance from month to month. As Millennial Mike learned, carrying a credit balance from month to month causes a higher utilization rate, accrued interest and overwhelming debt.
6. Relying on minimum payments to make ends meets. Budgeting for minimum payments only is a fast way to lose credit points and gain too much debt. According to data collected by iQuantifi, these consequences grow with age. Their study revealed that Millennials ages 21 to 25 have an average debt of $13,116. By the time they reach their late 20’s their debt has tripled to $46,622.
   
7. Spending to the limit. In addition to credit damage and debt, maxing out credit cards can exacerbate the problem by activating a penalty APR for high-risk credit users. For example, suppose Millennial Mike maxes out his credit card and continues making minimum payments. The credit card company raises his APR to 25 percent, creating another hurdle for Mike to overcome on the path to credit heath.
8. Paying late. While every consumer group is guilty of the occasional late payment, Millennials are guilty of apathy by failing to contact their creditors to ask for forgiveness and to have late fees waived, a strategy that works 86 percent of the time.
9. Failing to see the difference between private loans and consumer credit. Millennials face the unique challenge of securing an affordable education—and finding a way to pay for it. According to data from the National Center for Education Statistics, the average college graduate is saddled with $33,000 in student loans. While federally-backed loans carry less risk, millions of Millennials are forced to turn to private loans to cover the remainder of tuition and fees. How does this relate to credit? Characterized by variable interest, exorbitant fees and no bankruptcy protection, private student loans are little more than long-term consumer credit accounts. This trillion-dollar problem plagues young Americans who cannot decipher the difference between credit risk and wise lending. Learn more here.
10. Failing to use credit at all. Perhaps the largest credit card mistake is failing to use them at all. 31 percent of Millennials avoid credit cards entirely, citing the recession and risk as their main turn-offs. Although the consequences above can be avoided with non-use, stepping out of the credit game damages long-term health by:
    • Shortening credit history
    • Losing the benefits of a positive payment history
    • Limiting experience and diversification
    • Closing doors to financial opportunities, e.g., buying a house, car, etc.

The bottom line: Millennials have plenty of room for improvement, but their goal is possible with the right tools. Review our blog for helpful tips. What you learn will help you avoid age-specific mistakes.

Related Articles: 

How Millennials Treat Credit and Debt, According to Facebook — and Why They Should Change Their Approach

5 Ways Millennials Need to Use Credit to Their Advantage

20 Easy Ways Millennials Can Boost Their Credit