OK, Kids, a Little Credit Card Debt Will Not Hurt You

by Brian Riley 0

It seems counterintuitive, but it is time to have a financial talk with your millennial adult children. Some debt is good.  It is easy to be tempted with $5,000 credit lines but getting credit when you do not need it is easier than getting it when you do.  Moreover, when the day comes for them to buy a house, condo, car, or boat, an established credit file will help.

  • Less than a third of Millennials say they have a credit card, while more than half of people age 30-49 own one and nearly 70% of people over 65 do, according to 2016 Bankrate survey.

  • Many watched parents or friends slip into debt during the 2008 financial crisis. Others have been crippled by student loans that take years to pay off.

Long ago and far away, I was in my twenties.  Getting a credit card was exciting.  It validated me as an adult.  It allowed me to buy things I could not afford and could pay out over time.  At one point, while I was a young bank officer at Citi, a friend of mine and I had a contest to see how many credit cards we could get in 12 months.  I got 14; my buddy got 18.

Maybe it was a silly boyhood game, but today, my high FICO score reflects the fact that my oldest credit item on file is 27 years.

  • Experiences like that have made Millennials wary of spending money they do not have and more likely to rely on debit cards or cash, according to Bill Pratt, author of The 7 Things Every College Student Needs to Know About Credit, Debt & Ca$h.

Unbeknownst to my three adult children, I gave them a headstart in building a credit file.  Each has a secondary card in his or her name that ties to a credit file.  Bureaus pick up that it is a secondary card and it eliminates the “thin” file status that would otherwise occur.  A few times, I have even taken the cards out of our home safe for them to use, either to travel or spend for a special occasion.

The article offers three tips for millennials: building a credit score, going for rewards and fraud protection.

Here are my household tips for Riley millennials that might fit your needs.:

  1. Start out with an easy card targeted to young adults. Discover has cards aimed at college students, and so do national banks.  Don’t try to hit it out of the park with an American Express card. [My daughter ignored this advice, answered an American Express pre-screened offer, and now has a useless inquiry on her file.  She will probably not go back to American Express as a result.]
  2. Once you start getting credit cards, new cards get easier to acquire. Don’t be piggy about it.  The sum of your total outstanding potential credit card debt should not be more than about 40% of your gross income. That is measured in credit lines, not debt.
  3. Avoid paying interest. Don’t put that new iPhone on your MasterCard or Visa. $1,000 at 20% interest gets expensive.  Either don’t get the iPhone or put it on a free interest plan with your carrier.
  4. Interest is expensive. Don’t revolve your debt unless you are buying something specific; if you do revolve pay three times the minimum due.
  5. Understand the rewards game. There is no reason to write a check or use a debit card at a grocery store or restaurant when you can get 2% back in cash rewards.  Don’t be silly though, and spend your money twice.
  6. Make multiple monthly payments online. If you go out to a $100 dinner, when you return home that night, make a $100 payment.

…And, most importantly, if you blow this thing out because you ran up your credit lines to the max, don’t call your mother.  Call me and expect a lecture.

Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group

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