Young Generations Face Credit Card Debt Crisis

Young people may never pay off their credit card debt. That’s the hypothesis that experts and reporters have made based on a recent study by an Ohio State economics professor.

The study found that the younger generation of borrowers, those born between 1980 and 1984, has $5,500 more in credit card debt than their parents’ generation and $8,000 more in credit card debt than their grandparents’ generation. And worse, this particular generation of borrowers is taking longer to pay off their debt than previous generations. There were 32,542 participants in the study. More debt and slower payoff can easily equal never paid off debt if nothing changes.

Young people are racking up credit card debt before they ever enter the workforce. In 2009, the average college senior had over $4,100 in credit card debt and half of college students have four or more credit cards. These statistics were in an April 2012 study titled Financial Literacy and Credit Cards and published in the International Journal of Business and Social Science.

Considering how hard it’s been for recent graduates to get jobs – 53% of recent college grads are jobless or underemployed according to AP – the credit card debt crisis with young people will probably get worse before it gets better. Graduating with debt and no job doesn’t bode well for a young adult’s finances. After all, how can you pay your bills without an income?

The increased importance of having a good credit score to make it in the real world may be one of the reasons young adults are more eager to start building credit. They’ll need to have good credit to buy a house or rent an apartment or to get a car loan. Unfortunately, one of the best ways to start building credit is to start using credit. But credit can be like a drug that you can’t stop using despite all the negative effects. Also, people tend to overestimate their future ability to repay the debt they’re accumulating.

The Credit CARD Act may make it easier for the newest crop of young adults to stay out of credit card debt. The new law, which went into effect in 2010, requires young people under age 21 to have sufficient income to get a credit card. Otherwise, they’ll need a cosigner, someone who has enough income to qualify for the credit card. If young people are kept from getting credit cards in the first place, there’s a decreased chance of them running up balances they can’t afford to repay.

Student loan payments – which generally can’t be discharged in bankruptcy – can make it difficult to pay back credit card debt. Student loan payments can also put a strain on a graduate’s income, causing them to rely more heavily on credit cards to make ends meet.

Yong people will have to make some changes if they want to change the direction of their debt. Otherwise, they’ll have to work well into their retirement ages because debt made it impossible to create retirement savings. Worse, they may carry debt to the grave, leaving it for their heirs to deal with. Future generations aren’t necessarily liable for repaying the debts of their grandparents. However, creditors may have claims to assets in the deceased estate.

The way to get out of debt: stop creating new debt and start paying more than the minimum. It may be difficult, but it’s not impossible. I doubt you’ll regret the hard work, especially when you’re no longer sending monthly payments to creditors.

Source: International Journal of Business and Social Science, Vol. 3 No. 7; April 2012