Today’s Young Adults Will Never Pay Off Their Credit Card Debts

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When we talk about Americans barely into adulthood who are saddled with debilitating levels of debt, the conversation is almost always about student loan debt. But there’s a growing body of evidence suggesting that today’s young adults are also drowning in credit-card debt — and that many of them will take this debt to their graves. 

More than three-quarters of renters between the ages of 18 and 24 spend more than they earn every month, according to a survey of 1,000 renters (of all ages) by Rent.com. This is the case even though 17% of respondents in that age bracket say they’re willing to live with roommates to save money.

More than 20% overspent their income by more than $100. That’s every single month. And since they haven’t built up their credit histories yet, it’s a safe bet that these young adults are paying relatively high interest rates on the resulting credit card debt.

Although more young people than older adults blame “socializing” as a barrier to saving money, most young people aren’t knocking back $20 drinks in trendy lounges. They’re struggling with much more prosaic financial demands. For 42%, rent is their top expense, while 18% say transportation costs eat up the biggest chunk of their earnings and 22% say paying for food eats up the greatest share of their monthly budget.

(MORE: Why More Americans Will Fall Behind on Credit-Card Bills This Year)

To a disturbingly large extent, the young and the broke are relying on credit cards to make it until their next payday. This obviously isn’t sustainable in the long run, and it’s going to put a huge drag on this demographic’s spending power even after they reach their peak earning years, because they’ll still be paying interest on that carton of OJ or box of spaghetti they bought a decade earlier.

A new study out of Ohio State University found that young adults are racking up credit card debt at a more rapid rate than other age groups, and that they’re slower at paying it off. “If what we found continues to hold true, we may have more elderly people with substantial financial problems in the future,” warns Lucia Dunn, co-author and professor of economics at Ohio State University. “If our findings persist, we may be faced with a financial crisis among elderly people who can’t pay off their credit cards.

(MORE: The Verdict Is In: Tackle Smaller Debts First)

People born between 1980 and 1984, for instance, already have an average of $5,689 more in credit card debt than their parents did at that age. And remember, those parents are members of the generation that’s now starting to worry about whether or not they’ve saved enough for their impending retirements. Their kids are going to be able to save even less since they’re funneling so much more into servicing their burgeoning debt.

Along with more debt, this age cohort is paying off those debts at a sharply lower rate than their parents. Dunn says a lot of these young people are never going to get out from under their credit card debt. “Many people are borrowing on credit cards so heavily that payoff rates at these levels are not sufficient to recover their credit card debt by the end of their life, “ she writes in the study. “We can expect more people to carry credit card debt at death, which could have loss implications for the credit card issuing banks.”

Banks can file a claim against someone’s estate if they die with both debt and assets, but if the deceased doesn’t have any assets, banks can’t go after their heirs and have to just eat the loss. This is bad news for the banks, but sympathy may also be in order for the people who literally live their lives under a cloud of credit card debt.

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CierriaMahr
CierriaMahr

" To a disturbingly large extent, the young and the broke are relying on credit cards to make it until their next payday. " Tsk, I am 21, never getting any credit card. It sounds nice being able to buy the things. But the debt that follows isn't. I learned from someone else's mistake.  Besides, with a credit card..... how can you really feel like an adult. It's  not money you earned. Now I understand that their are adults with jobs who also use them because they need them. But a credit card just isnt worth it. Especially when the interest rates constantly change.

SamanthaGarter
SamanthaGarter

When I married, the spouse came with a house that had a mortgage on it.  We're two young people, barely making ends meet, and the mortgage was just barely manageable.  Then FEMA came along and told us our house was in a high-risk flood zone and we had to get a flood insurance policy on it.  This forced us to go out, get a personal loan to pay off the mortgage, or we would lose the house.  Which meant our 7% mortgage became a 9.9% personal loan.  So perhaps this isn't a common story, but it's one example of why a certain couple has zero money to apply to paying off our credit cards.

nagarpoe
nagarpoe

I felt like I was alone in having less money than I'm spending each month but it seems like I have company. Insightful article. 

heyhowareyouall
heyhowareyouall

Wow, they really hit this on its mark for me. 550 for rent, 140 for gas, 241 for car payment, 77 for car insurance, 30 for internet, 400 for groceries, 290 for student loan, 90 for cell phone = $1818 total. 

I'm 26, I make $30,000 a year, after taxes and insurances (lucky to have it), that's comes to $1721 a month, that's $97 more I'm spending than earning. Sure I can drive less and cut back on my food bill, I've tried, but it's not happening well, and really isn't worth it. I won't even mention spending money....Either way, I'm looking for a second job. Ah Life.

XiraArien1
XiraArien1

Amerika is screwed. These people will be living off the dole until the day they die because there aren't jobs good enough for them to avoid prison.

BarryHillard
BarryHillard

Are you seriously trying to project a 20 something's credit card debt 40 years into the future? The angle you miss is bankruptcy. For many of them it will be binge on credit until until no one will give them any, then file and let the banks eat it all.

MarkWhite
MarkWhite

"sympathy may also be in order for the people who literally live their lives under a cloud of credit card debt"

Why is sympathy owed people who choose to spend more money than they make and then default on it in the end?   I have zero sympathy for such people and if they argue that they just can't survive without borrowing I can point to genuine poor people, who don't have access to credit, who manage to live on far less money.

The solution is counter-intuitive but it is to make all debt non-recourse.  The only thing a lender can do if someone defaults is recover any pledged assets (house/car).  What that does is limit the availability of unsecured credit and once people have easy credit removed they have no choice but to live within their means.  Credit is like crack cocaine, it's addictive.  Time for Americans to go cold turkey.

deanwormer
deanwormer

While I won't dispute the facts stated in the article, I will the conclusion.  Part of the reason so many young adults have built of these debts is because the economy sucks and they aren't getting (or keeping) the kinda' jobs they need.  This will shake itself out over time, they'll start forming family-units and pay the debt down, then they'll start retirement saving.

ruraynor
ruraynor

Well, hopefully I won't fall into this category. I'm 23, in my last year of being a student, and have just £300 of credit card debt. The majority of this sum is because my laptop broke the week before my dissertation was due and as it was still the school holidays, my university's computer suite was only open for a couple of hours a day. I made the decision to buy the cheapest netbook PC World had (£185) so I could finish my crucial essay. 

The other stuff on there is, as suggested by the article, food and transport costs. Quite often I'll need to top up my Oyster card or buy a train ticket and not be able to pay with my debit card because I need that money for rent. Ditto on food purchases. If it's the week before payday and my fridge is bare then I'll occasionally put a couple of things on there to see me through. It's rare that I spend more than £10 at once on my credit card though. I don't buy clothes on it, other than 1 emergency pair of shoes (winter boots wore through to nothing and I didn't have any other waterproof shoes).

AJosephHunter
AJosephHunter

sympathy for being imprudent? i don't think so