Why young consumers are credit shy

By Marianne Curphey

Almost half of consumers under 35 years old have no interest in using credit cards and prefer to use cash or debit cards to fund purchases, research from Auriemma Consulting Group (ACG) has found.

Here's why young consumers are so credit-averse -- and why overcoming their credit shyness can help them achieve their future financial goals faster and easier..

Giving credit the cold shoulder
In a January 2013 ACG survey of young consumers in the UK, 44% of respondents under 35 said they had no interest in using credit cards as their main method of payment. Instead, many in the under-35 crowd favour debit cards and cash, with 49% listing debit as their primary payment method and 27% listing cash. Compare that with the 20% in this age group who said that credit cards were their primary form of payment. fear-of-credit

Why this aversion to credit? The researchers concluded that the recession and tightening of lending standards has left young people unable to obtain credit, or at least unable to obtain cards with good terms. So, they are opting for financial tools that are within their reach. Plus, those who came of age during the economic downturn have been trained to worry about debt, but not to value the advantages of credit.

"The recession led to a combined effect of consumers being unable to acquire credit, and caused them to become wary of 'spending money they do not have,' " says Matt Simester, managing director at ACG. "These consumers have not yet been educated on the benefits of building a credit history. "

Even if lenders start to relax their terms, many young consumers may still be shell-shocked by the effects of the credit crunch, says National Debtline spokesman Paul Crayston.

"We're now nearly five and a half years on from the onset [of the credit crunch], but some will be once bitten, twice shy when it comes to borrowing money," Crayston says. "Others may have seen the effects of debt problems on friends, family members."

It's not just a fear of credit that's keeping young consumers away. Rather than being credit-shy, Crayston suggests young consumers may just be "credit card shy." Crayston points out that many young people will have mobile phone contracts, which is technically a form of credit. So, it might be the convenience of other financial tools compared with credit cards that is pushing young people toward debit, cash and even high-cost alternative financial products such as payday loans.

"[Aversion to credit] may also be exacerbated by the proliferation of online short-term lenders whose speed and ease of use can appeal to younger generations despite the increased costs of borrowing this way, " Crayston says.

Some will be once bitten, twice shy when it comes to borrowing money.

   -- Paul Crayston, National Debtline

Too much risk for little reward
Even if young consumers can get a credit card, they're not very likely to find it rewarding, at least at first. Because young consumers often have thin credit files, it's difficult for them to access some of the best rewards, interest rates and credit limits on the market.

"Undoubtedly, lenders are looking to cherry-pick customers with solid credit backgrounds," Crayston says. "This can make it harder for people new to credit to find a card that charges even the average APR."

That leaves young people with one less reason to make the effort to get a card, says Iona Bain, a 24-year-old money blogger, who highlights the issues of finances for Generation Y on Iona's Young Money Blog. Moreover, applying for a card and getting turned down could leave young applicants in a worse state.

"Young people can be reluctant to take out a credit card unless they have a specific need in mind," Bain says. "They are also afraid of having their application turned down, which doesn't look good on their credit record, but could just be because of their age, because they are not on the electoral register or because they have never borrowed or don't own a house. "

An added deterrent -- young people are often quite debt averse because they feel that their income might not be sufficient to support borrowing. If they were to lose their jobs (not exactly an irrational fear in a rocky economy), "then they would not have the capacity to pay it back, " Bain says.

Credit crash course for young people
Although there are some short-term advantages of not using any type of credit -- you significantly reduce the risk of falling into debt problems, for example -- credit does have long-term advantages. It can help to smooth the peaks and troughs of your financial life. Plus, even if you don't want credit now, you might need it later -- for a mortgage or car loan, for example. Using a credit card responsibly over several years can help prove to lenders that you can handle these heftier loans.

"Learning how to use credit responsibly is important for anyone hoping to take out a mortgage in the future, as a lack of credit history, even if caused by the best of intentions, can be a bar to obtaining a mortgage, " says Tracey Bleakley, chief executive of the Personal Finance Education Group (pfeg), an education charity that focuses on young people.

Fortunately, it's possible to harness the power of credit without risking your finances. In fact, a credit card can be a more effective way to borrow money than other methods -- like bank overdrafts, which sport high fees and which are difficult to compare amongst providers.

A lack of credit history, even if caused by the best of intentions, can be a bar to obtaining a mortgage.

   -- Tracey Bleakley, Personal Finance Education Group

Here are some tips for making sure a credit card helps you rather than hurts you:

  • Take advantage of credit card's alerts.

    "Many credit card issuers offer consumers the ability to be alerted when they reach a specific amount on their credit card, or are nearing their credit limit, " Simester says.
  • Automate the payment process. Bain recommends setting up a bank account to pay off a credit card bill each month.

    "If you set up your account so that you pay off your card each month, rather than making the minimum payment, then you can build up your credit rating, " she says.
  • Start small. One way to build up your credit history without putting yourself at financial risk is to take out a credit card, make a small purchase and pay off the balance immediately, Crayston says.

    "You can take this even further by using a card that offers some kind of spending rewards and making sure to set your direct debit to pay off the total outstanding balance each month," Crayston says. "That way you build a credit history with no risk of a debt problem and you get extra rewards in the process."
  • Monitor your spending. Because using a credit card can often make you feel detached from the real money you'll need to pay your balance, tracking your spending is crucial.

    "Setting a budget and sticking to is one of the most basic financial skills that we would like all young people to gain, " Bleakley says.

See related: How to make your adult children financially independent, Being too credit-shy can backfire

Published: 19 February 2013