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.

20 comments
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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

SamanthaGarter
SamanthaGarter

@heyhowareyouall I do not mean to criticize, but cutting the $90 for cell phone would be a place to start.  You can get a cheap prepaid (not smart phone) for $10-20 or so per month.  Another thing to look at could be the car insurance.  Perhaps if the insurance is rolled into your car payment, it's a "Cadillac" plan and covers things like thefts, etc.  You could perhaps go to a cheaper plan.  Some states have insurance policies you can get that are for poor people.  For example, in my state the government offers a pretty crappy car insurance plan that costs about $120 per year.  It's not a great plan, but it covers the other person's car if you cause a wreck.  As to cutting food costs, take a weekly trip to Costco or Sam's Club.  Take one day a week to shop and make all the dinners, then eat dinner out of your freezer.  My husband and I were shocked to see that we were able to save over $100 per month by not shopping at our local grocery store.  Finally, as to rent: I used to manage a small condo with several units.  When younger people like students came to me and honestly presented their financial needs, sometimes I could get the owner to budge on the rent a bit, say $25 per month.  Sometimes if they could manage to scrape together $200 or so for an extra deposit, I could get the owner to lower it permanently.  It's always better go keep a good, responsible renter than to try to find a new one. Just check it out, is all I am saying.

straydog
straydog

@BarryHillard Except, as with most things, having debt discharged in a bankruptcy is far more difficult for this generation (20 somethings) than previous ones thanks to the bankruptcy law changes enacted by Bush in 2005. You see Barry, since the 70s and 80s, the same benefits that the 'boomer' generation enjoyed, have been slowly stripped away by that same generation. Think about it for a moment: each program/incentive/benefit that their generation has received, has been decreased or simply removed entirely for subsequent generations. Government spending to make college tuition more affordable? They got it, then did away with it in the 80s. War on drugs? They spent their teens/early 20s blazing up and tripping out, then declared war on them in the 80s. They were coddled and nurtured as children so they could 'explore', then they sheltered their own children--told them how the world works instead of showing. They grew up expecting and demanding the world talk WITH them, and now they talk AT it. They've collected SSI off the current generations' backs, and want to do away with it as 'unsustainable'---but only AFTER they're done using it.

Surely you don't think, especially after the bankruptcy laws have changed, that anyone, especially the boys who changed those laws, are going to let ANY bank 'eat it all'--they own those banks or at least have a huge vested interest in them. Too big to fail, remember? I would even venture to say that our economy is being held hostage by them.

heyhowareyouall
heyhowareyouall

@MarkWhite If I could go back in time and never got that 1st credit card, I would. But at this point, I don't know how I could manage without it. My job may end this summer (non-profit work/grant money hoopla) so I may just end up being the genuine poor people you know so well, we will see.

DeweySayenoff
DeweySayenoff

@MarkWhite So let's cut off all unsecured debt and see where that takes us.

The richest 20% of Americans control 93% of the wealth of the nation (actually, a little more - that was in 2010.  Today, it's closer to 94%).  This is compared to 65% in 1980.  In effect, 30% of the wealth of the nation went to the wealthy over the last 32 years.  They spend a lot of money, yes, but their spending is in specific markets rather than everywhere, they don't spend enough money to make up for the lost 30% of wealth that USED to be circulating in the economy.

Money circulating in the economy is what drives demand, which then drives job creation, when then improve3s the economy.  This is an important thing to keep in mind as I explain how your idea, while it has merit in some ways, is not a viable plan.

80% of Americans, between us, control only 6-7% of the total wealth of the country.  The economy is NOT recovering for them.  The wealthy have received all the benefits of the recovery (thus giving lie to the fallacy that by giving them tax cuts they'll create new jobs because they are getting a hell of a lot of money and not using it for new job creation.  By and large, they're investing it, which takes it OUT of circulation since the businesses in which they invest are ALSO not spending it, but paying it back in dividends.)

Banks aren't lending money in traditional loans but they're flush with it.  In the meantime, predatory credit card practices are undermining the ability of our youth to pay them off.  The credit limits are too high, the interest rates are obscene, the annual fees are utterly ridiculous.  This is because the banks want to make a profit to pay investors and bonuses.

So what's happening is that the wealth continues to go to the wealthy from the poor.

No jobs are being made, and what few come to the market these days aren't jobs at a liveable wage.  But right now, that spending through credit is what's driving the economy.  Take that away, and the economy tanks.  There are enough young people spending enough money in enough places to keep it faltering along on a slightly upward trend while their lives are being siphoned off to give to the wealthy.  That two dollar carton of OJ will end up costing them a couple of hundred dollars in the long run.  But the spending of that two dollars NOW is why we have an economy that's supposedly getting better.

Cutting off that flow of money into the economy cold turkey will just tank the economy.

The way to fix this is to regulate the banks again.  Money has to flow.  Predatory credit practices must stop.  Credit lines should be in keeping with their ability to repay.  Repayment terms should be flexible.  Debt forgiveness shouldn't be part of it, but interest forgiveness should, with plans that include an option to freeze the credit card  use - and the interest on the principle - until the principle is paid off a limited number of times with a final fee to be paid before re-initiating the card.  All without impacting someone's credit rating.

I would also go back to the way things used to be before deregulation in the 1980s with regard to the banking system.  I'd split off investment banking from depositor's money, and consider making that aspect of the banking system non-profit.  This removes the major motivation to become predatory with depositor's money in the first place.  I would also create criminal penalties for the individuals involved in violating this arrangement, rather than letting them just walk away.  This will help secure the banking system and prevent the kind of thing that led to the creation of sub-prime mortgages and the whole real estate market bubble and subsequent collapse.

But to make that work, people - the kind who actually spend most of their income - need to HAVE money to spend.

Toward that end, I'd shift the tax burden to those with the most wealth by percentage of net worth compared to other Americans.  Those who are the wealthiest, they get taxed the most.  Those who are the poorest get taxed the least (if at all).  This will free up a lot of money in the pockets of people who DO spend it in the economy and, yes, "redistribute the wealth" but not based on a liberal political ideology, but from a pragmatic point of economic law.  That will put more money into circulation which will help fuel economic growth by bottom-up spending, increased demand from bottom up spending and new job creation from increased demand.

The money flow from the bottom up comes from consumer spending.  The money flow from the top down comes from shifting the tax burden away from the poor and onto the wealthy.  The money circulates.

This way, people CAN have credit, and more importantly, can pay it off in a reasonable amount of time.

Stopping the flow of money in a capitalist economy is death to that economy.  Cold turkey is a bad idea all by itself, but moderation in credit, along with the continued circulation of money in the economy, are workable ideas, assuming we can ever get Congress to actually pass a workable idea in the first place.

MarkWhite
MarkWhite

@deanwormer 

The reason for their debt has nothing to do with the economy and everything to do with people CHOOSING to live beyond their means.  Why cut back when times are tough when you can just pull out the plastic to pay for things?

DeweySayenoff
DeweySayenoff

@AJosephHunter On the bright side, you're God, were born "all wise and all knowing" and never made a mistake in judgement.  Good to know.

DeweySayenoff
DeweySayenoff

@MarkWhite @deanwormer Mr. White assumes that all people just spend because they can, even if they can't afford it.  Many do, but not all.  And he also assumes that one has something with which to "cut back" in the first place.

I suppose living in a tent on the side of the road qualifies for cutting back when there is no income to begin with.  There's more to "getting by" than "cutting back".  If you've lost your job to a slowed economy (or can't find one in the first place), have no savings and can't find affordable housing, exactly WHERE can you "cut back'?  Take public transportation (Which, by the way, often costs more than driving a car these days)?  Live in a cardboard box?

At what point do you decide to use credit you shouldn't use?  When the alternatives are starving to death?  

Simple-minded, knee-jerk reasoning and a holier-than-thou attitude don't fly in the real world when the choices are put a few dollars on the credit card or go hungry for a week, or don't pay for the antibiotics you need, or don't pay for the new tires you have to have to drive safely, or don't pay for something else vital to your safety.

Yeah, it's a choice.  But I'd love to see how YOU fare without a reliable, liveable income.