WASHINGTON — Charlie Frohne never wanted a Visa or MasterCard, afraid of incurring debts he couldnt repay. As the 30-year-old searched for a Manhattan apartment, he found landlords treated his lack of a credit history as a liability.
His experience highlights a growing reluctance among young adults to use plastic for everyday purchases. Thirty-nine percent of undergraduate students between the ages of 18 and 24 owned a credit card in 2012, down from 49 percent in 2010, a Sallie Mae and Ipsos Public Affairs survey found. And young adults who do have credit cards are carrying smaller balances: A median of $1,600 in 2010 compared with $2,500 in 2001 for under-35 households, according to Federal Reserve data.
The trend, rooted in stricter lending rules and weaker job outlooks for young Americans since the 2008-2009 recession, has implications for the strength of the economy. As people in Frohnes age group eschew plastic, fewer are building the credit histories that would help them to gain financing for purchases of homes and cars that are critical to economic growth.
You could say that theyre not going to get mortgages, and that could have dire economic consequences, said Ann Schnare, who is now a consultant in the mortgage industry and who formerly worked as vice president of housing economics and financial research at Freddie Mac in McLean, Va. But that assumes a static model. I think that the industry will respond.
Credit bureaus and the lending industry are stepping up their search for new ways to bolster credit files, and young people who dont pay credit card bills often do pay mobile phone bills. As reporting agencies gather data from telephone, rent and other payments, some scoring models incorporate it to help assess candidates creditworthiness.
If the only way to get credit is to borrow, young people are going to be slower to borrow. It is circular, said Rachel Schneider, senior vice president of insights and analytics at the Center for Financial Services Innovation, which grew out of a research project done on behalf of the Ford Foundation in 2002 and strives to help so-called underbanked consumers access stable financing. Leveraging extra data is a way of bringing new people in for banks as the economy rebounds, she said. It helps them expand the market.
Credit card borrowing, one of the drivers of the consumer spending that makes up 70 percent of the U.S. economy, has been shrinking across all age groups since the recession. New York Federal Reserve data showed that total credit card debt declined by $25 billion, or 3.6 percent, for the fourth quarter of 2012 from the same period in 2011. Since the fourth quarter 2007, it has dropped about 19 percent, based on Fed data.
The decrease has been marked among consumers younger than 35, a Pew Research analysis released last month found. Credit card use for young people began declining prior to the recession, and between 2007 and 2010 dropped 20 percent, based on the Pew findings. The share of young American households carrying a credit card balance fell to 39 percent in 2010 from 48 percent in 2007.
That could be partly the result of a 2009 law, the Credit Card Accountability Responsibility and Disclosure Act, which made it more difficult for credit card companies to market and distribute cards on college campuses, said Brannan Johnston, vice president and managing director of credit bureau Experian Plc.s RentBureau division.
Scarce job opportunities for young adults also play a role. Unemployment for those between the ages of 20 to 24 stood at 13.1 percent in February, up from 7.4 percent in February 2007. Joblessness rose to 7.8 percent among 25 to 34 year olds from 4.8 percent in 2007, based on Labor Department data.
Theres a greater awareness among young people about the risks of borrowing when job prospects are lower, said Terry Sheehan, an analyst with Stone and McCarthy Research in Princeton, N.J.