So, why are millennials wary of credit cards when older generations usually choose credit over debit? To get to the bottom of this conundrum, you first need to understand the environment in which millennials were raised.
They are children of the Great Recession
Millennials grew up in rocky economic times. When the Great Recession began in late 2007, it rocked consumers. According to the Bureau of Labor Statistics, unemployment rates reached 10% in 2009. The number of job openings decreased by 44% during the recession as a whole.
The uncertainty that came with the Great Recession put young consumers on notice. Things that appeared to be going smoothly before the crisis came crashing down – seemingly overnight for some. And it can happen again.
As a result, millennials tend to seek the security of debit cards, which are tied to accounts that are insured by the FDIC. In their mindset, if the economy tanks again, they won’t have any high-interest credit card debt to pay off.
Millennials are wary of more debt
Many are quick to point to big banks when laying blame for the Great Recession. But unwieldy spending on the part of consumers also contributed to the mess. At the end of 2007, consumer debt reached 127% of disposable income, compared with 77% in 1990.
Knowing that high debt loads can have that kind of impact has turned younger consumers off to borrowing. Rising student debt levels may also contribute to millennials’ aversion to credit. According to Student Loan Hero, 2016 college graduates were shackled with an average of $37,172 in student loans.
Indeed, millennials already feel like they’re drowning in debt. They certainly don’t want to add to this burden.
Federal regulations make credit cards less accessible
For many millennials, credit cards simply weren’t available to them as they were coming of age.
Before the Credit CARD Act of 2009, credit card issuers were handing out credit card applications like candy on campus. In fact, they’d often give out free candy, T-shirts, and other swag to encourage college students to apply.
With the CARD Act, however, credit card issuers were limited in how they could market to young consumers. For example, applicants under 21 must prove they have sufficient independent income or apply with a cosigner. Credit card issuers are also prohibited from offering tangible items to students on campus to encourage them to apply.
Accordingly, students no longer see credit card companies hanging around campus with free stuff. And, because federal regulations make it harder for students to get approved, credit cards aren’t as much a part of college culture as they once were.
Why Using a Debit Card Can Be a Smart Choice
There’s no one-size-fits-all answer to which type of plastic is better. But there are some compelling reasons to choose a debit card for your everyday purchases.
Spending is limited to what you have
Debit cards are tied to your checking account, so there’s no revolving credit line like with credit cards. In most cases, the bank deducts your purchase from your balance immediately, and when the money’s gone, it’s gone. As a result, debit cards are a great option if you have issues with overspending or want to avoid debt.
You can avoid fees
Some credit cards charge annual fees that you can’t waive. What’s more, some merchants, including gas stations and utility companies, may charge an extra fee if you pay with a credit card.
You can often avoid these fees by opting for a debit card instead. Even if you have a checking account that charges a monthly fee, some banks will waive that fee if you use your debit card regularly. There are also online bank accounts that come with debit cards that charge no bank fees at all. Chime, for example, offers no overdraft or monthly fees. Plus, every time you use your debit card, Chime will round up your spending amount and deposit the round-up into your savings account. How’s that for no fees plus extra cash?
You can avoid interest
Because debit cards aren’t tied to a credit line, there’s no interest involved like there is with credit cards. Of course, credit card users can avoid interest by paying their balance in full each month. But for some people, the temptation to pay over time instead can cost them.
You Do You
There are several arguments about which is better: debit or credit. Ultimately, the right choice is the one you make for yourself. For people who can budget and deal with debt responsibly, credit cards may be a good choice. However, you may not fall into this camp.
If you’re like most young consumers who prefer to avoid financial risks altogether, debit cards are the perfect answer.