Millennials Have Less Credit-Card Debt Than Ever. Here's Why That Could Be a Bad Thing

Declining credit-card debt is for the most part a good thing, but can have some adverse effects. Credit habits among millennials have changed in recent years as a result of the recession and federal laws, and now it may effect their future creditworthiness.

Millennials are ignoring credit cards. Therefore it is no wonder that credit-card debt is decreasing among the 18-29 age group. The numbers may astound you: In 2007 the average credit-card debt per person was $3,073 and now it is $2,087. When you stop using credit cards and focus on paying off what you already owe, the balance decreases.

It's a good thing that figure is decreasing, because the latest unemployment report showed the jobless rate for 18-29 year olds ticked up to 11.6%, 4% higher than the national average. It is wise not to apply for a credit card when you don’t have a job. The application itself involves a credit inquiry and minimum payments are still required even if there is an introductory 0% APR. Student loans are not helping the situation.

There are pros and cons to this and multiple other factors to consider.

In ignoring credit and living a cash-only lifestyle, young people are switching to debit cards and pre-paid cards. Both carry risks that are in the fine print, most commonly glazed over. These alternatives provide convenience, but at a cost.

A recent Think Finance survey showed that 45% of people ages 18-34 have used such alternatives and that convenience over banks was the main reason. Prepaid cards have “hidden” fees and debit cards associated with checking accounts can come equipped with overdraft protection.

In extremely negative terms, overdraft protection has been characterized as a “protection racket.” According to the newly created Consumer Financial Protection Bureau (CFPB), over a fifth of newly opened checking accounts in 2011 have still opted in, accruing an estimated $30 billion in fees for banks last year.

Overdraft protection supposedly protects you by allowing a transaction go through even though your account doesn’t have the funds to cover the purchase. It doesn’t cost anything to opt for overdraft protection, but the bank charges you when you need it and you have to pay the fee back — doubly as bad, since you are already in the black with the recent purchase. It penalizes you for having a zero balance which is already bad news. The fees add insult to injury for the consumer while making the bank richer.

The Credit CARD Act of 2009 placed more restrictions on millennials applying for credit cards. Income requirements became more strict and co-signers became necessary for applicants under 21 if their income was not sufficient. The most common co-signers were parents, whose credit ratings would become affected if their children missed payments or defaulted.

One of the positives behind millennials dropping credit cards is that those with a credit score of over 760 has increased from 8.6% before the recession to 11.2% in 2012. The opposite of this is shown for people 40 and over, who have seen their debt loads increase (possibly to help their children who are graduating from college and still searching for careers). FICO scores for the 60+ group decreased by 3.8%.

This trend toward better credit scores and what could be shaping up as a employment recovery could continue if better credit practices are continued. Financial education is gaining prominence and the knowledge learned at the millennials'’ age and younger could serve them a lifetime.

In a move to strengthen such literacy, the American Bankers Association is increasing its efforts to educate more young people and their families, specifically around student loans. The ABA has had a program in place since 2001 where bankers volunteered their time to help people in credit need. Student loan education has been added as a focus point. With student loan debt burdening not just the 18-29 age group, but people well into their 30s — it's their second-largest source of debt behind mortgages — there is definitely a need bring that number down.

Debt of all kinds is best when managed appropriately and not taken for granted. Credit cards are a good thing if you don’t let the interest rates and fees add up too much. Less regulation and more financial education can prove to be a powerful tool in enlightening people on these fees and practices. That way, 20 years from now, the millennials of today will not see their credit scores sink and the future 18-29 age group will be more educated on what awaits them.