Americans in general are struggling with credit card debt. Those just starting out are particularly vulnerable.
With limited financial resources, lower wages and shorter credit histories, young adults have a harder time managing high-interest debt than other age groups, according to a new study. Urban Institute report. Nearly one in five adults between the ages of 18 and 24 with a credit history in the US currently have debt in collection.
“Young adults are particularly vulnerable,” the report authors wrote. “The high cost of borrowing, coupled with limited income, makes debt management difficult at this stage of life.”
General, credit card balances are rising, up 15% in the most recent quarter, the biggest annual jump in more than 20 years. At the same time, credit card rates now exceed 19% on average. an all-time high – and keep going up.
But for new credit applicants, APRs are often even higher, up to 30%according to Ted Rossman, a senior industry analyst at Bankrate and CreditCards.com.
“When you have poorer credit, you have to pay more to borrow, which can make borrowing even more difficult to pay back,” said Kassandra Martinchek, a research associate at the Urban Institute and co-author of the report.
“Because young adults have this unique vulnerability, it’s easier for a financial shock to hit and throw you off track,” Martinchek added.
Those who live in communities of color are even more likely to have credit problems and past due debt.
Young adults in mostly black and mostly Hispanic communities have nearly twice the rate of credit card delinquency as young adults in mostly white communities, the Urban Institute found.
These young adults also have lower average credit scores than their white counterparts, according to another Analysis of the Urban Institute based on Vantage scores. And your credit score is more likely to deteriorate over time.
“Race and ethnic disparities arise from this legacy of restricted access to avenues of wealth creation,” Martinchek said.
The Credit CARD Act, which was passed in 2009, restricted card companies from issuing credit to new and young customers unless they can demonstrate the ability to make payments or have a co-signer.
And yet, “young people, and college students in particular, still receive unsolicited offers of pre-approved credit cards,” the report found.
In addition, younger consumers are increasingly choosing to buy now and pay later. “An attractive alternative to credit cards, BNPL products offer fast credit approvals and little to no interest,” according to the report.
However, the more Buy Now, Pay Later accounts open at the same time, the more likely consumers become to overspend, make late or late payments, have poor credit, and more. studies show.
“It’s a slippery slope,” Rossman said. “Sometimes it can work, but sometimes it ends up being a bit of a cheat and a ticket to overspend.”
“That may be an early sign of financial trouble,” Martinchek also said.
Without much regulatory oversight, the BNPL market currently exists in “a legal gray space,” according to Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.
Credit cards are still considered the best way to start a credit history, which is important for young adults just starting out.
Good credit paves the way for low interest rates on mortgages and auto loans and can even make it easier to rent an apartment.
The best way to improve your credit comes down to paying your bills on time or lowering your credit card balance, Rossman said.
Rossman advises borrowers to keep revolving debt below 30% of your available credit to limit the effect that high balances can have. Asking for a higher credit limit or making an additional payment in the middle of the billing cycle can help.