Trading Big Mistakes for Little Mistakes

Last week the New York Times had a story about how everyone’s favorite punching bags, the millennials, aren’t using credit cards nearly as much as previous generations:

Data from the Federal Reserve indicates that the percentage of Americans under 35 who hold credit card debt has fallen to its lowest level since 1989, when the Fed began collecting data in a standardized way, according to an analysis by The New York Times.

Some older Americans have also been shedding credit card debt since the financial crisis that began in 2008. But for no other age group has the decline in the proportion holding credit card debt been more rapid than it has been for young Americans — who are often referred to as millennials — the data from the Survey of Consumer Finances shows.

“It’s pretty clear that young people are not interested in becoming indebted in the way that their parents are or were,” said David Robertson, the publisher of The Nilson Report, a newsletter that tracks the payment industry.

Since holding credit card debt is one of the most wealth-destructive behaviors a person can do with their finances this would generally be seen as a positive from a common sense perspective. Debt usage exploded in the 30 or so years leading up to the financial crisis and was one of the main reasons it was so painful for so many people when the unwind finally hit.

But there is another impact of this reluctance to accept more debt:

Their reluctance could have lasting repercussions for millennials, as well as for the financial system and the economy. Early use of credit cards has, in the past, helped young Americans develop a comfort level with credit that can last a lifetime and lead to a succession of big purchases financed by debt. Without a substantial credit history, it is much harder to take out a home mortgage, for example.

“It will probably take them longer to get access to credit,” said Gregory Elliehausen, an economist at the Federal Reserve specializing in consumer finance. “In the meantime, their behavior and some of their habits will have already been formed.”

The paradox here is that credit card debt can be extremely damaging to your finances but building up credit can be essential to helping you gain cheaper access to other forms of borrowing when you really need it.

In a perfect world, everyone would have a credit card. They would pay off the balance every month, earn rewards on all their purchases, build up a great credit score and stay away from the pitfalls and wealth destroying nature of credit card debt.

But we don’t live in a perfect world where everyone makes reasoned and rational decisions. If we did all of the credit card companies would go out of business because no one would be paying 15% a month in interest charges on their debts.

Some people can handle the ease of use and many benefits that credit cards provide. But for others the temptation to spend from a simple swipe (or annoying chip insertion) of a card can prove to be too difficult to allow them to budget and save properly.

So on the one hand, it may be a mistake for so many millennials to shun credit card debt because it could lead to costlier credit down the line. On the other hand, this means that more millennials are avoiding the high interest rate debt spiral that can be insanely difficult for people to get out of.

While it would be great if everyone could simply behave and use their credit cards responsibly, that’s never going to happen. If accepting one error (a lower credit score) allows you to avoid much larger problems areas (credit card debt) I think that’s an acceptable trade-off. Everyone has their own financial demons so any way that you can minimize your own problem areas should be considered a win, even if it’s not perfectly ideal.

Personal finance is always going to be about making trade-offs. You have to balance out your present self and your future self. Delaying gratification versus enjoying yourself now. Saving for the future while making good memories in the present. Trading current consumption for future consumption.

In some ways, it’s also about trading big mistakes for little mistakes in an effort to keep yourself sane and survive without completely sabotaging your finances.

I say do whatever you have to do to keep yourself out of trouble.

How Millennials Became Spooked by Credit Cards (NY Times)

Further Reading:
Personal Finances > Portfolio Management


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