Yahoo Finance Young Americans Rely on Credit Cards: Why This Is an Economic Red Flag
Credit cards can be very useful financial tools, particularly in terms of building credit history. Credit cards also allow cardholders to rack up rewards and points while providing a financial safety net. But for young Americans, they can also come with a hefty price tag and further restrain their financial futures.
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A May 14 report from the Federal Reserve Bank of New York found that 15% of Gen Zers — who have a median balance of $760 — and 12% of millennials (who have a median balance of $2,378) maxed out their credit cards in the first quarter of 2024.
“As explored in our post on the third-quarter 2023 Quarterly Report, Gen Z has the highest delinquency transition rate, but Millennials were the only group whose delinquency exceeded their pre-pandemic rate,” the New York Fed report stated.
To put the above figures into context, as of May 13, the average overall interest rate in America was 24.71%, per LendingTree. LendingTree noted that this represents the highest result since it began tracking rates monthly in 2019.
“The findings say that the recent issues with inflation and the slowly recovering economy hit Gen Z hard, as many didn’t have savings to withstand the pandemic and the policies prior to and during the pandemic that caused inflation to ramp up,” said Scott Lieberman, founder of Touchdown Money. “While the economy has been on an upward trend, this trend says that Gen Z will take time to recover from what it’s been through.”
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A Worrisome Trend
The findings are in line with a May TransUnion report, which found that following significant events impacting the economy since 2020, Gen Z borrowers are opening more credit lines and have both higher debt levels and delinquency rates compared to millennials at the same age. In turn, they lean more heavily on credit cards and auto loans as inflation pressures their pocketbooks.
According to Ted Rossman — senior industry analyst with Creditcards.com — the fact that so many Gen Zers are falling behind is “worrisome.”
“The combination of higher prices and higher interest rates has created an environment in which 58% of people with credit card debt have had that debt for at least a year, up from 50% in 2021,” he said. “We’re seeing more people financing daily essentials such as groceries and gas and this can be a tough cycle to break.”
Delaying Financial Milestones
Because of this credit burden, many young adults are now delaying life milestones for financial reasons.
“To the extent that falling purchasing power and mounting, costly debt loads keep younger generations from reaching a financial position which they deem suitable for starting a family, there will be medium- to long-term effects,” said Peter C. Earle, senior economist with the American Institute for Economic Research. “Lower rates of marriage, more childless couples and similar outcomes are likely.”
At least one other expert noted that while the overall increase in American wealth far exceeds the overall growth in debt, it isn’t evenly distributed — which is why the higher credit utilization and delinquency rates for Gen Z and millennials is “especially concerning.”
“Younger Americans with shorter credit histories and lower incomes are more susceptible to financial inflexibility for a number of reasons,” said Stephen Kates, CFP and principal financial analyst for Annuity.org. “Many younger Americans still have student loan debts and many are having children or buying homes which makes their situation more delicate.”
Kates noted, however, that as young Americans earn more and increase their credit limits, their high utilization will begin to match the older generations.
Yet, the biggest hurdle to those with high or unpaid balances is the high interest rates on credit cards — rates which are now the highest in decades, he added.
Inflation Taking a Toll on Savings
Rossman argued that even before the recent bout of high inflation, prices attached to big-ticket items such as college degrees, housing and childcare have been increasing faster than wages for decades.
“A lot of people are using credit cards and buy now, pay later services just to get by,” he said. “The personal saving rate is near an all-time low. People tend to get into credit card debt because of practical things like emergency expenses — say, an unexpected medical bill or car repair — along with day-to-day expenses outpacing their paychecks.”
Rossman conceded that while it’s easier said than done, it remains extremely important to make credit card debt payoff a priority.
“Solutions include 0% balance transfer cards, nonprofit credit counseling and looking for ways to up your income and cut your expenses,” he said.
And according to Earle, the rate at which younger Americans are showing signs of financial distress is directly attributable to inflation — and the Fed’s rate-hiking campaign.
“Higher prices over the last three years have eaten up more of their paychecks, and to the extent that they’ve made up the difference by taking on credit, higher credit card payments are creating additional financial stress,” he said.
Decreased Spending
The rising number of maxed out credit cards and rates of delinquency among zoomers and millennials strongly suggests that not only are these young people a highly constrained consumer group, but that their spending is likely going to decline over the rest of the year — perhaps sharply, said Earle.
“Also, if we wind up getting a Fed rate cut or two over the remainder of 2024, it won’t create a lot of breathing room for those borrowers,” added Earle. “A quarter point rate cut will only translate to a small change in credit card rates.”
Implications for the Housing Market and for Older Generations
Finally, another implication of this trend could be the potential impact on the housing market. While the economy has been on an upward trend as of late, this trend indicates that Gen Zers will take time to recover from what they’ve been through, per Lieberman.
“Most likely, it’s going to be very difficult for Gen Z and millennials to become homeowners,” he said. In turn, he added that this also means it will be equally difficult for boomers to cash in on their homes.
“If nobody can afford the asking price, boomers will have to take less money when the time comes to downsize, which could make their retirements tougher than they think,” he said.
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This article originally appeared on GOBankingRates.com: Young Americans Rely on Credit Cards: Why This Is an Economic Red Flag
