credit cards · Payments

Are credit cards losing their allure?

I’m on a credit card kick.

The credit card has gradually worked its way into the mainstream consumers wallet over the past few decades.  Now, around 65% of American consumers have at least one credit card and the average American makes about 20-25% of their payments with a credit card – comparable to the usage of debit cards and cash. There is, however, a lot of variation over demographics, particularly age and income, when it comes to credit card use. This post will focus on the age issue (although age is linked to income so it’s all related).

Studies of credit card behavior have shown that younger and older individuals use credit cards differently. Older people tend to have more credit cards and use them a bit more. This is not surprising given what we know about the PILC hypothesis. This paper takes a deeper look though, and shows that younger individuals tend to use more of their credit lines (as a percentage) and are more likely to be in credit card debt. The probability of being a revolver (i.e. not paying off your debit in full each month) decreases with age. Part of this is because credit limits also increase with age (and income). The potential problem is that it disincentives people (especially young people) from saving because they can basically use credit cards as extra income.

Since the fall out from the Great Recession, there’s been a lot of buzz in the media about the effect of debt on millennials. This conversation usually focuses on student loan debt. A recent string of economic studies and news stories alike has began to paint a picture of the millennial who’s terrified of debt and is therefore eschewing credit cards. This article from the New York Times discusses why this may be the case providing some interesting anecdotal evidence about what may have caused this shift in thinking versus 10 years ago when getting a credit card as soon as you turned 18 was essentially a rite of passage. Basically the narrative is that after watching what happened with the financial crisis, younger people are scared of being in debt and don’t trust banks/credit card companies.

There is also data that supports this trend. This recent publication from the St. Louis Fed shows how credit card debt has evolved since 2004. Since the recession ended, it has fallen off sharply (by about 25%) .  Individuals younger than 46 accounted for 68% of this deleveraging. There has definitely been a trend in recent years of younger people taking on less credit card debt.

As with many things though, there is a question of whether this is a supply-side or a demand-side issue. Legislation following the financial crisis, particularly the CARD Act, made it much more difficult for young people to get credit cards, as intended.  The act proscribed credit card issuance to individuals under the age of 21 unless they could provide written proof of a means of repaying the debt AND it prohibited recruiting credit card users within 1000 feet of any college campus AND sending pre-approved card solicitations to individuals under 21. This combined with the general tightening of credit following the recession (not necessarily related to the CARD act) may have contributed to fewer young people jumping on the credit card bandwagon.

I do think there’s an argument for the demand-side case too. It’s much harder to quantify, but it’s feasible that there’s been a cultural shift in attitudes toward credit cards over the past decade. Trust in financial institutions is certainly waning. There is evidence that it’s harder for college graduates to get jobs today than it was before the recession and wages are stagnant-(though maybe not anymore –  a post for another day).  Earnings matter because we know income to be correlated with credit card adoption and use. So maybe young people don’t want credit cards because they think they can’t afford them. Or because they don’t want to be in [additional] debt. There are many possible explanations and there’s certainly a lot of grey area.

It will be interesting to see what the next decade brings as people who came of age during the financial crisis and Great Recession spend more years in the labor force and begin to earn higher incomes. I suspect that credit card behavior will begin to look more like previous generations and that this is probably just a blip. With so many other options for payments becoming available though, it’s hard to tell. I think that trust in financial institutions is a huge component of this and broken trust isn’t easy to mend.



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