Maybe the kids really will be all right. At least financially. A recent report by W.P Carey School of Business in Arizona revealed that individuals who open their first credit card account at a younger age are less likely to default on their payments than individuals who first open a credit card later on in life.
So are toddlers the newest savvy credit card holders? Not quite. There have actually been regulations to limit and regulate the use of credit among younger generations. The results have successfully created a more positive relationship between teens and young adults and their credit.
The Credit Card Accountability Responsibility Act of 2009
The study pinpoints the Credit Card Accountability Responsibility and Disclosure (CARD) Act as a cause for the responsibility being seen in young credit card holders. The Act mandated stricter requirements for obtaining a credit card, making it more difficult for young individuals to open up a credit card account without a cosigner. The Act also prohibited banks and lenders from advertising cards to students on school campuses.
These new regulations have had a positive impact as the decrease in default and delinquency by younger card holders indicates a healthier relationship with credit.
So what could we learn from the younger generations?
Learning From Smaller Mistakes
While credit card companies have argued that the stricter regulations limit young people’s exposure to credit cards as a financial literacy tool, the reality is that the CARD Act ensures that a teen’s interaction with credit is under the supervision of a co-signer. This means that young individuals generally make smaller mistakes thanks to the guidance from their parents or guardian. Thus these mistakes can be caught in time and quickly become a learning experience. For example, a small mistake like a missed payment can be used to teach the importance of timely payments. On the flipside, a late mortgage payment made by an adult has more drastic consequences. A home is collateral for a mortgage, which means too many missed payments could result in losing your home. The result of the mistakes made early on? A kinder, gentler learning curve for the use of credit — resulting in healthy habits formed early on.
Choosing Debit Over Credit
Having witnessed a history of economic turmoil, young adults and Millennials are far more likely to reach for their debit card to pay for items. Use of existing funds paired with a responsible use of credit to build credit history results in less borrowed, more paid for. Instead of buying to payback, the tendency to buy based on current numbers has helped young individuals to avoid high credit card debt.
Lowering the Debt Threshold
Young individuals may be facing the ongoing struggle with high student loan debt but their credit card debt hasn’t followed the same astronomical boom. This shift could very well be reflective of a lower tolerance for high personal debt. Whereas student loan debt has become an almost accepted part of the academic process, avoiding credit card debt and buying based on availability of funds rather than credit is one way that young individuals are demonstrating authority and choice over personal debt.
These changing relationships could indicate a more stable financial future for upcoming generations.
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