Generation Y (born between about 1985-2000) have been called lazy and entitled by the old media and older commentators; but are we also “addicted to debt?”
Australians seem addicted all round; according to ASIC, Australians owe a collective $32 billion on their credit cards. That’s $4,300 per cardholder.
The Experian credit-reporting agency looked into Generation Y and debt, and found startling statistics.
Gen Y Australians apply for twice as many credit products such as credit cards and personal loans than older Australians. On average, a Gen Y has a debt of over $29,191! Gen X by comparison has an average of $36,821 but is also at least two decades older. Note that Gen Y is only 22% of the population; 5.22 million people.
A millennial with a mortgage, credit card and/or personal loan is $428,000 in debt on average. That’s $146,000 more than the equivalent Gen X and Baby Boomer.
A lot of this is blamed on a high-risk lifestyle that “lives in the now.” Financial firm GenWorth research shows that Gen Y is “focused on short-term disposable luxuries rather than investing or saving money.” But Gen Y can avoid much of their financial woes by taking on some simple financial truths.
65% of Gen Y mismanages their credit cards
SocietyOne research also showed that almost two-thirds of Gen Y mismanage their credit cards, sending themselves into a never-ending spiral of debt.
One of the common ways to mismanage a credit card is only paying the minimum amount each month.
Let’s look at the averages: if you only pay $88 a month on a $4,300 debt at 18%p.a., you will end up amassing $14,500 in interest over 30 years! If you increased your repayments (assuming you don’t spend more on your credit card) to $220 a month, you will save $9,463 in interest and pay off the debt in one year, eleven months.
Unaware of better, cost-effective credit solutions
Many Gen Ys pay for large-ticket items on their credit cards when a personal loan could suffice. Some Gen Ys pay for holidays, renovations, even weddings on their credit cards.
With the average wedding costing $36,000 while making only the minimum repayment of $731 per month on our 18%p.a. card, you would pay for two more weddings in interest ($93,420.)
A personal loan at almost half the interest rate – 9.9%p.a. – would only attract $10,387 in interest, assuming a $10/month account-keeping fee.
Some millennials even pay for mortgage repayments with their cards, which is paying interest with higher interest! This can lead to defaults on one and the other, which leads to a bad credit history.
64% of Gen Y don’t know about credit histories
64% of Gen Y is unaware of what a “bad credit history” is and the consequences it has.
A bad credit history can limit your access to new forms of credit such as car loans or home loans. For Gen Y chasing home ownership, this means they can only borrow at higher, “bad credit” home loan rates.
“A bad credit history can follow you around everywhere, even when you’re buying something relatively small like a new mobile phone,” says Savvy CEO Bill Tsouvalas. Savvy is one of many brokers that see Gen Y get into trouble due to a lack of understanding about credit histories. “By making some simple financial changes, Gen Y can make sure they go into their mortgage at the best interest rate possible, instead of inflated bad credit rates,” Tsouvalas says.
How to avoid the credit trap
Gen Y can avoid the credit trap by paying off their credit card in full, when possible. We can make it easier on ourselves by transferring a big balance (such as that wedding) to another credit card with a 0% balance transfer offer. This way you can pay off the balance without paying more interest.
Though Gen Y is taking up fewer credit cards over the last half-decade, it’s important to use credit cards to build a healthy credit history. Budgeting and restraint will go a long way in keeping your credit history clean and your finances in check!