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Why Are Millennials Avoiding Credit Card, Auto, and Mortgage Debt?

Why Are Millennials Avoiding Credit Card, Auto, and Mortgage Debt?

Pew Research released an intriguing study recently identifying a new trend amongst younger borrowers.

Millennials--younger adults under the age of 35--appear to be dropping their debt faster than previous generations, but are also not embracing the American dream of home (or even auto) ownership.

The study shows that young adults in this category reduced overall debt by 29% from 2007 to 2010; whereas older U.S. consumers were only able to chip away at debt by 8% during the same years.

Young adults paid down mainly credit card balances with only 39% carrying a balance in 2010 versus 48% in 2007. Student loan debt has inched up from 34% in 2007 to 40% in 2010.

Although millennials have less credit card debt, they are reluctant to seek financing for a home mortgage or auto loan. Between 2007 and 2011, young adult homeowners dropped from 40% to 34%.

Richard Fry, Pew’s senior research associate (and study author) told TIME that while debt reduction is positive, lower home ownership isn’t great news.

“Young adults don’t have the mortgage, but they also don’t have the house,” he said. “Young adults probably have less debt, but they also have less assets. This is troubling.”

Shannon McIntosh, consumer education specialist for Michigan Schools & Government Credit Union ($1.1 billion, Clinton Township, MI) told The Detroit Free Press that the younger generation might be feeling skittish after seeing what older generations faced.

"They've seen their parents have trouble," she said. "And they don't want to repeat those mistakes."

McIntosh also wondered if emerging technology has played a part in why younger consumers aren’t gobbling up auto loans. "You don't need to be face-to-face," she said, and you think, 'Why should I get a loan for a car I don't need.' "

Why Are Millennials Backing Away from the “American Dream?”

As the country digs out of one of the worst recessions in history, Fry wonders if recessionary scars have left a deep mark on millennials.

He says that that one reason millennials shy away from loans is that they don’t believe they would be approved for one in such a tight credit market.

However, The Wall Street Journal recently reported that while the mortgage market remains clamped down, auto lending criteria appears to have loosened quite a bit.

The Journal reports that a January Federal Reserve survey of senior bank-lending officers found 16% reporting they had eased standards for making auto loans in the preceding three months—compared with 6% for prime residential mortgages.

"For most people, the rates are the lowest they've ever been,” Greg McBride, senior financial analyst for tells the Journal. “Anyone with decent credit is going to get a loan at a lower rate than they've ever seen before," he says.

Fry says that another thought is that more young adults were searching for work instead of actually having a stable position, which reduces their ability to obtain financing.

Although the job market has been nearly nonexistent for years, recent reports indicate blossoming improvement.

ADP’s February figures show that the private sector added 198,000 jobs last month. "It feels like underlying job growth continues to improve. At the current pace this should be enough to start bringing down unemployment," said Mark Zandi, chief economist at Moody's Analytics to U.S. News and World Report.

While news has been optimistic, talk of the current sequester may make millennials still hesitant. "Fiscal policy is a very significant headwind to economic growth," Zandi said. "I would be surprised if we don't see some slowing in job growth as we make our way through the summer to the fall months."

Yet Zandi adds that he doesn't think the sequester will send the country back to the drawing board completely. His current projections predict job growth moving back into the 100,000 per month range, as compared to the averages in January 2012 of 180,000.

Credit Union Advice

Millennials who may be still on the fence about whether a loan is right for them should seek the advice from a credit union loan expert.

Countless credit unions like Harvard University Employees’ Federal Credit Union ($325 million, Cambridge, MA) offer free financial literacy seminars to help young adults examine their options and make an educated decision about their financial future.

“College students as a whole just aren’t financially sophisticated,” Shahar Ziv, a Harvard Business School graduate who helped organize the workshop told The Boston Globe. “Harvard students are no different than other students. Succeeding academically does not necessarily translate into being financially literate.”

The Globe reports that approximately 70 students attended the seminar and revealed that attendees were confused about how interest rates or credit scores worked.

“They are all raising the same concerns about stress and lack of financial knowledge,” said Thomas Murphy, director of student services for the Harvard University Employees Credit Union. “There is the perception they should already know this stuff, but they have never been taught.”

Trying to plan for the future? Find nearby credit unions and inquire about low rate auto loans and mortgages.

By Gina Ragusa
Published March 8, 2013
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