Millennials have been accused of disrupting many industries, from newspapers to brick-and-mortar stores. Credit cards appear to be next in line.
Just one out of three millennials in the United States carries plastic, according to a Bankrate.com survey, compared to the majority of older Americans. In addition, a survey from the Federal Reserve found the 18 to 24 demographic preferred to pay cash more than others. And if they do carry a card, it tends to be of the prepaid or debit variety, TD Bank found.
None of that bodes well for banks like JPMorgan Chase or payment networks such as Visa and MasterCard, since the fees they earn from debit card transactions are less than those earned via credit cards. The 2008 global financial crisis and ballooning college tuition in the US may have also scared some millennials away.
"They experienced the Great Recession just as they were beginning school or starting their career, pondering about buying a home," says Erin Currier, director of financial security and mobility at Pew Charitable Trusts. "They’re very sensitive to this life experience."
Here in the UAE, attitudes towards credit card debt are also changing, with the vast majority of residents now paying off their bills in full at the start of each month. An October survey from the comparison website yallacompare, found that 70 per cent of credit cardholders now ensure they clear their outstanding balance every month to avoid building up interest charges.
Less than 5 per cent of those polled said they only pay the minimum payment on their credit cards every month. The remainder said that they regularly pay more than the minimum required, but tend to have a little outstanding credit card debt every month.
This showed an improvement on a 2013 study, carried out by the same company, that found 42 per cent of UAE cardholders were only making the minimum payment each month.
Millennials in the US, meanwhile, are more likely than older generations to have student loans to pay. About 41 per cent of them held such debt, according to a 2015 Pew report. That compares to, at their peaks, 26 per cent for Generation X,13 per cent for Baby Boomers and 3 per cent for the Silent Generation.
And the burden is heavier, too: from 1990 to 2015, student debt for the typical university bachelor’s degree increased about 164 per cent, according to Education Department data.
Those big obligations could explain millennials’ aversion to borrowing, Ms Currier says. Over time, they may never grow as comfortable with credit cards and debt as previous generations have, she adds.
TransUnion confirms US millennials carry fewer cards and have lower balances than Gen-Xers did when the latter group was aged 21-34, thanks in part to legislation limiting the marketing of credit cards on campus and the subsequent boom in the use of debit cards. Millennials have also increased the use of auto and personal loans, TransUnion found, at the expense of credit cards.
Take Bo King, 26, who applied for his first credit card about a year ago, grew up cautious after watching friends and family pile up thousands in debt. Mr King, who works in retail, has been using a debit card since turning 18, but knew he would need a credit history to be able to buy a house.
“I’ve always been sceptical about getting a credit card,” Mr King says. Eventually, though, “I saw it as a necessary evil."
Mr King is right to be wary about building up credit card debt, as it typically offers customers the highest interest rates. But while many millennials are getting savvier about debt, it has not stopped other Americans putting more on plastic. According to a report from the Fed, total credit card debt reached its highest point ever last year, surpassing $1 trillion.
Experian's latest annual study on the state of credit and debt in the US, released in January, found the average American now has an outstanding credit card balance of $6,375, up nearly 3 per cent on last year. The credit reporting company also found that the average number of credit cards held is 3.1. However, the credit balance figure for Millennials drops to an average balance of $4,315.
It’s an evil some millennials will shift to from prepaid and debit cards as they get older, according to a study by payment processor TSYS Merchant Solutions, which shows credit cards becoming the preferred method of payment after age 25.
That’s the saving grace for the card companies. A breakdown of balances by age suggests that the older people get, the more they rely on credit cards. A FICO study showed 18- to 24-year-olds had an average balance of just over $2,000. With 25- to 34-year-olds, the number almost doubled, says Ethan Dornhelm, vice president of Analytics and Scores from FICO.
“As millennials grow older and more affluent, the ownership of credit cards and the need for and desire for credit cards will increase,” says Solana Cozzo, vice president of Prepaid and Financial Inclusion at MasterCard.
They’re not only expected to change their spending habits when they have children, but they’re also more likely to be in tune with the awards credit card companies bestow, like airline miles and cash back on purchases.
Perhaps the issuers should tie rewards to student loan debt. Sam DeMario, 20, who is finishing his undergraduate degree, has been putting off getting a credit card until he can earn a bit more money and start paying off his school bills.
"Once I’ve been accepted into a graduate program and have a stipend that I can report as income, I don’t see a reason not to have one," says Mr DeMario.
UAE residents also have a strong preference for cards that offer additional benefits such as air miles, cashback and entertainment offers.
Almost a third of those polled by yallacompare said that cashback would be the most important feature, if they were choosing a card based on its rewards. A quarter of respondents said that lifestyle benefits and discounts was the most important reward, while air miles was the next most popular feature.
And most UAE cardholders take advantage of the perks offered with the credit cards, with 35 per cent “almost always take advantage of all of the card’s benefits” and a fifth stating they use their card’s benefits once or twice a month.