Money habits of the Millennials are an important topic today – this generation is setting up new trends in major consumer markets and will lead the future. Based on the numerous studies, Millennials treat money differently than their parents; in our today’s study, we are using the World Bank Global Findex data to understand better the Millennials relationship with money.
There is definitely a new pattern of payment card usage by Millennials. Credit card usage among young people declined significantly in the last 5 years; this trend is more visible in the US and less in other OECD countries. At the same time, the usage of debit cards is up – there is an apparent shift from credit to prepaid and debit instruments.
If we look at the usage of credit cards across different age groups, Millennials will have the smallest number, and this gap only widens since 2011 (see chart below).
This finding correlate with the research by the Federal Reserve Bank of Philadelphia that show a heavy usage of prepaid cards by Millennials.
It is widely believed that prepaid cards target at low income and unbanked population and the youngest customers. The survey shows that the distribution of prepaid cards is quite consistent across a much wider group of people. The interesting finding is that so called “power users” both young and high income love these cards and use them well above the average.
Number show that Millennials earning $50k or more and Generation X’ers, earning $100k+ use prepaid cards much more intensively than other user groups.
One of possible explanations of this phenomenon is that Millennials grew up with prepaid cards in their pockets – one of the first prepaid cards that was targeted at teens - Buxx by VISA was launched in 2001.
Similar study, compiled by Princeton Survey Research Associates International for Bankrate.com, says that 36% of Americans between the ages of 18 and 29 have never had a credit card.
Some experts blame a Credit Card Act that made it much more difficult to sell credit cards to college students and young people under 21. After 2009 it became impossible to get a credit card if you are under 21 without taking your parents on a board as co-signers.
However, there is a chance that Millenials are leading the general migration of Americans from credit cards. According to the 2014 Gallup poll public attitude to credit cards shifted and Americans less rely on credit cards in the last years.
Personal finance experts warn us that having a credit card doesn’t necessarily mean that you have problems with debt. It is often quite the opposite – you need to have your credit in a good standing at least by the time when you shop around for a mortgage.
Millennials generation may miss the opportunity to grow their credit score with such a useful tool like a credit card. According to national credit bureau Experian data, an average credit score for Millennials is about 628 (vs. 681 National average), which is in the poor to fair credit score range. It hard to qualify for a mortgage with such a low score. Even if you get one, you will overpay about 1.6% in higher mortgage rates, which will result to big overheads in a lifespan of the typical mortgage.
Frequent late payments and high credit utilization ratio are two other problems of Millennials generation, according to Experian. Both problems could be avoided with a practice of rational and responsible everyday credit card usage.
This is a popular concept that Millennials are not into having debt and are more responsible with their finances than their parents. Our data show that it is not always true.
Millennials are definitely saving more than older adults: 82.5% of those aged 15-24 saved any money in 2014 vs. 74.1% of older people. More than a half of Millennials (56.8% in precise) were saving for education and school – that supports the thesis that raising college costs are a big concern for the current generation.
However, despite the low credit card use, Millennials are borrowing more frequently than older adults (56.5% people of age 15-24 borrowed any money in 2014 vs. 50.4% respondents of age 25+).
What’s interesting, only 19.3% of young adults borrowed money for school or education. Very marginal group of millennials borrowed to cover healthcare costs or to start a new business. We can assume that the majority of the Millennials loans are car loans and other consumer credit.
Ready or not, a new generation of customers is already setting new trends. Let’s see how traditional banks will react to changing landscape and new customer’s demands.