Surprise! Young Adults Have Smartened Up About Debt

Michael Nagle, Bloomberg News via Getty Images Credit cards, with their high interest rates and exorbitant fees, have often trapped college students and other young adults in debt spirals that can be almost impossible to escape from.

However, the latest generation to hit young adulthood has learned some lessons that their older peers didn’t — and that’s helping many of them avoid the credit-card trap.

Young adults have gotten a lot smarter about using credit cards, according to the most recent data from credit-score company Fair Isaac and its FICO Banking Analytics blog. Outstanding credit-card debt has fallen by nearly a third during the past five years, with the average outstanding balance among those 18 to 29 now standing at just $2,087 compared to $3,073 back in late 2007.

Moreover, a rising number of young adults don’t even have credit cards at all.

In 2005, only about 9 percent of young adults went without a credit card, but that figure has jumped to about 16 percent, about double the rate among those 30 to 39 who don’t have any credit cards.

Although legal restrictions that have limited the ability of borrowers under 21 to get credit cards have undoubtedly played a role in those figures, FICO notes that young adults are also increasingly using debit and prepaid cards as an alternative to credit cards, forcing them to keep their spending within the limits of their bank-account or prepaid-card balances.

The Impact of Student Loans

But before you celebrate the news too much, keep in mind that young adults are far from debt-free.

Even as outstanding balances on mortgage loans and credit-card debt have fallen for the population at large, student loan debt has continued to rise. Over the past five years, ballooning average student-loan debt levels have led to average indebtedness rising from $6,490 to $11,444. That dwarfs the less than $1,000 drop in average credit-card debt, showing the extent to which student loan debt has made it increasingly difficult for young adults to manage their finances successfully.

Still, even when you consider the impact of rising student loan debt, FICO found that overall, total indebtedness among young adults fell sharply, with a 17 percent decline amounting to nearly $7,000 less in total outstanding debt.

Falling mortgage debt has driven the lion’s share of those declines, which is consistent with the “Generation Rent” effect, in which more young adults are choosing to rent homes rather than buy in the aftermath of the housing bust. A recent report from Pew Social Trends found that only 34 percent of households led by those younger than 35 owned their primary residence in 2011, compared to 40 percent just four years previously.

Keeping Debt Under Control

Even with the declines, today’s average young adults still owe more than $32,500 all told, according to FICO. But what’s particularly encouraging about the news is the fact that young adults aren’t just fleeing debt generally. Rather, they’re being strategic in focusing on debt financing that’s most likely to produce tangible results in the future.

Student loan debt tends to carry more attractive interest rates than credit-card debt, and the investment in education should arguably lead to better earning potential in the future that could offset the costs that young adults have incurred.

With mortgage rates still historically low, it’s unfortunate that more young people aren’t taking advantage and buying homes. Yet with uncertainty on the employment front, foregoing the huge commitment of mortgage debt indicates a level of maturity that many in previous generations lacked — and which helped create the problems that led to the housing crisis.

Stay Smart

Looking forward, the true test will be whether young adults avoid the siren song of debt when their economic prospects become more secure. Only then will it be clear whether young adults were more prudent by choice or by necessity.

For now, though, their level of maturity in facing economic difficulties should serve as an inspiration to generations to come.

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