Once derided on the cover of Time magazine as the “Me Me Me Generation,” millennials have, in fact, become the “Owe Owe Owe Generation.”
This group originally showed a healthy aversion to credit card debt. From 2008 to 2012, only 41% of those in their 20s had a credit card. That number has grown to 52%, as millennials seem to be succumbing to our credit-crazed culture.
Unfortunately, a large percentage are mismanaging that debt. To that point, 8% of millennials’ card balances were seriously delinquent in the first quarter of this year, according to the New York Federal Reserve Bank. That is by far the highest for any age group.
Millennials are already saddled with $370 billion in student loans and have lower net worth than their predecessor generation at the same stage in life. They obviously can ill afford to be taking on this additional financial burden.
Credit card debt is the worst kind of debt. It’s high cost — the average card currently carries a 17% interest rate — and earns little in return.
Of course, there’s good debt. Other forms of borrowing can make economic sense. A student loan can be a good investment, as a degree from a quality college can add substantially to lifetime earnings.
Borrowing to buy a home has historically proven to be a worthwhile investment if you let the equity build as you pay down principal. Even an auto loan may make sense if you need it to get to a good paying job. (Although, in another troubling trend, auto loan delinquencies are also rising among millennials.)
Credit card usage can also make sense when borrowers pay their balances in full each month, keeping the effective interest rate at zero. Cards can be a convenient way to make payments and many have advantageous rewards programs.
However, carrying balances and letting accounts become delinquent, as millennials are increasingly doing, is financial insanity. Once you fall behind on card payments, it’s hard to dig out.
A recent survey by the Financial Industry Regulatory Authority Foundation shows that 60% of credit card borrowers between the ages of 18 and 34 carry sizable balances, pay late fees or engage in other costly credit card behaviors.
Card delinquencies can also severely damage a borrower’s credit score, leading to higher rates on other borrowing, such as a car or home loan.
Yet, it is no wonder that millennials are ill-equipped to understand and manage debt.
Debt and excessive borrowing have defined their life experiences. At an early age, they witnessed taxpayer bailouts of a reckless financial system that had crashed our economy because of too much leverage. Then they lived through an uneven economic recovery engineered by near-zero interest rates that rewarded borrowing while punishing savers.
They entered college as the government and higher educational institutions encouraged them to take out student loans, misrepresenting them as “financial aid.” And they have watched the national debt keep climbing to new highs, as a profligate government goes all-in on Dick Cheney’s “deficits don’t matter.”
So, is debt a good thing or bad thing? Does it matter how much you borrow?
Millennials are understandably confused. As a society, we should set better examples of financial prudence. One measure I have long advocated is to embed financial education into core curricula, from grade school through college. Young people need to understand the basics of debt, its benefits, its traps and how to responsibly use it.
Financial illiteracy is pervasive among the young, and study after study has shown the efficacy of financial education in combatting it.
The late and great investment banker Pete Peterson once wrote that “the ultimate test of a moral society is the kind of world it leaves to its children.”
By bequeathing our young people a world saturated in debt without the skills to manage it, we are failing that test miserably.
— By Sheila Bair, former Chair of the FDIC She is also a member of CNBC’s Financial Wellness Advisory Council.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.