There’s been a lot of chatter about millennials and their finances this year — rising student loan debts, dismal employment statistics, non-existent retirement savings — but the topic of credit disengagement has caught my attention the most.
A recent survey conducted by Bankrate.com revealed that 63 percent of 18- to 29-year-olds don’t have a single major credit card. The reasons given: they don’t think they need one, they don’t want the debt risk or they fear becoming more financially unstable than they already might be following the recession.
While I sympathize with my fellow millennials in feeling that student loan debt and unemployment woes are burdensome and can make you leery to take on credit, I don’t think avoiding plastic is a good way to go. In fact, I think spurning credit cards can make it even harder to get on your feet in the first place.
If you’re a millennial delaying credit engagement, here’s how that decision may cost you:
1. More time under your parent’s roof
Approximately 57 percent of millennials are still living at home with their parents, according to the Pew Research Center. If you’re part of that majority, you’re probably interested in getting out on your own as soon as possible.
While staying with family is a good way to save money, unless you are building credit at the same time, you could prolong your stay even after saving up enough to move out.
Just like banks check your credit when you apply for a mortgage to buy a home, most landlords run credit checks on potential renters, even if that applicant just wants to room with someone already living in the building. The same is often true for people looking to sublet.
Having a good credit history shows landlords that you are responsible and can be trusted to fulfill lease obligations, so without credit — or with bad credit — your rental application may be denied.
Sure, there are things you can do to help get your foot in the door without a credit history, but they may be more costly or take more effort. Paying a larger security deposit, showing proof of consistent income, sharing letters of recommendations or getting a lease co-signer (like mom or dad) can help demonstrate the financial qualities landlords look for in tenants, according to U.S. News & World Report financial blogger Susan Johnston. Avoid those steps and you’ll probably be better off.
2. Missed opportunities to save money
If you are on a tight budget and looking to save a little extra money, using a credit card with reward perks could help.
Even if you limit how many times you shop, eat at restaurants or fill up your gas tank, if you are paying for those activities with debit or cash, you could be missing out on saving a few extra dollars by using a credit card.
Rewards credit cards can give cardholders a percent of their purchases back as points that can be redeemed for cash back, statement credits, merchandise or even gift cards. Even a store-only credit card offered by your favorite retailer could be a good way to start building credit and get a few rewards or substantial discounts for your typical purchases — so long as you pay your balance in full at the end of the month to avoid high interest charges.
If you find a card with rewards that match your lifestyle — like a gas rewards card if you commute to work each day — your savings could start to add up while you establish a good credit history.
3. Less time to learn from your mistakes
Remember hearing the phrase, “Everyone makes mistakes,” as a child? Well, that phrase applies to your adult years of handling credit, too.
Knowing how to manage and build credit well are not skills you’ll learn overnight. A card with an unspent credit limit can be tempting to use on things you can’t really afford. And while you learn to balance a full-time job, student loan payments and other “adult” bills, you might forget to make a card payment or two. That’s OK, as long as you learn your lesson.
But the sooner you engage with credit, the more time you have to learn from and repair the damage from those little mistakes you’re likely to make along the way. You’re better off dealing with the aftermath of missed card payments in your early 20s while still under your parents’ roof than when in your mid-30s supporting a young family.
Now I’m not saying go out and get five new credit cards and start experimenting. Start by requesting a free copy of your credit report at AnnualCreditReport.com. Get to know what’s on it and make a habit of checking it a couple times a year.
The sooner you catch credit report mistakes or, God forbid, identity theft, the more time you have to deal with it before big life events that demand a squeaky clean credit history, such as taking out a mortgage or financing a new car.
If you’re really not interested (or able) to get a credit card just yet, there are other things you can do to help build a strong credit history, such as paying your student loan bill on time each month.
Small actions now can make big differences in the long run.