Young People Avoiding Credit May Be Making Mistakes

Millions of Americans suffered potentially significant financial difficulties and required a credit fix during and in the years following the recent recession, and this led many to be far more cautious about how they handled credit going forward. And while many young people didn't experience these money problems themselves, they certainly took note of the issues they caused and similarly seem to have resolved to avoid them.

That additional hesitance to take on credit of almost any kind is surprisingly common among many people in their late teens and on through their 20s, according to a report from the Denver Post. Part of that might be attributed to the fact that the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 made it far more difficult for those under the age of 21 to obtain a credit card on their own, and also banned certain types of marketing efforts that used to lead to many college students getting their first cards, the report said.

Consequently, many experts are now starting to express some concern as to the ability of these young people to qualify for potentially healthier kinds of credit, such as auto loans or mortgages, as they grow older, the report said. The fear is that if they do not have lengthy, broad credit histories, many lenders would be unwilling to give them good terms on those accounts, if they deem them qualified at all.

While credit card use has declined across the board over the last several years, its drop-off is most dramatic among that youngest demographic of borrowers; only 39 percent of households under the age of 35 years old now have any kind of credit card debt at all, compared to nearly half in 2007. That, in turn, has led the average amount of debt carried by people of that age to slip from $2,100 in 2007 to just $1,700 three years later. Many now rely purely on debit cards or cash to make purchases, and in the latter case, they may be under the misconception that this is having any impact on their credit standings.

"A debit card is purely a transactional instrument," Maclyn Clouse, a professor of finance at the University of Denver's Daniels College of Business, told the newspaper. "That's not establishing a credit history for you. The only way you're going to get that good credit history is by having a real loan."

How students can build credit safely
If you're a young person who wants to be cautious about your ability to manage a credit card safely — and therefore don't use them at all — you might want to sign up for a card despite your concerns, and simply manage it as wisely as possible. This can certainly include using it once or twice for very small purchases, just to establish the borrowing history, and then use it only sparingly after that once the initial debt has been paid off. This will help to build your positive repayment history (which by itself makes up 35 percent of your scores) and keeps your balance as low as possible versus overall credit limits (another 30 percent of ratings). Further, it will establish a credit history that will grow as long as you have your accounts open, and that makes up an additional 15 percent of your ratings.

Once you have that card established, you can file it away for an emergency if you want, or even cut it up if you want to, and it will likely remain open for a long period of time, even if it goes unused. You can also choose to use it more regularly, but you will need to do so responsibly, so that it is able to help you build a strong history that proves to lenders you can responsibly handle the accounts in your name. That, in turn, would likely allow you to have the credit standing in place to not only qualify for any future types of credit you might want to seek later in your life, but also get the best possible terms on those accounts when they're granted. That could help to save you thousands of dollars every year.

In addition to making sure you're managing your accounts correctly so that you can obtain the best possible scores, you should also be making sure you're regularly checking your credit reports from each of the three major credit bureaus. Doing so will help you get a better grasp on exactly where you stand, and even potentially determine whether you have any unfair markings listed on these documents, which may be dragging down your ratings. If you discover any such entries, you might want to work with a credit repair law firm, which may allow you get a better handle on your standing.