Millennials are the most discussed generation. Unlike boomers, they are receptive to new trends in technology, more welcoming to changes in general and have an analytical bent of mind. But alongside these positive qualities, negative ones lurk in them too.
They are not good at handling credit related matters. In fact, over the time, millennials have incurred bad reputation. That they misuse credit card is the most common allegation against them. And it’s not a baseless allegation. Here are the mistakes that millennials have been making with credit card:
Max out the card
Just because you have a credit card doesn’t mean you should max out its credit. Be frugal, don’t purchase unless it’s necessary. It’s an advice that’s difficult for millennials to follow. To understand why it’s difficult, let’s have a sneak peek at their lifestyle.
Millennials are likely to work in information technology sector. They dine out at posh restaurants on weekends, or go to movie theaters along with their friends or partners and go on tours whenever they feel bored and long for some time away from the daily hustle and bustle.
Because tech-savvy they prefer using credit cards instead of hard-cash. But they are also less informed. And the lifestyle they maintain cost them extra bucks, often unnecessarily. The result of all these is maxed out credit line. Not only it puts millennials in (financial) harm’s way, but affects their utilization ratio too. A high ratio translates to a high credit risk. Usurping credit line pushes the debt-to-credit ratio over the recommended 30%.
Forgetting the due date
Another grave mistake that looks innocuous on the surface but deleterious in reality.
What’s the harm in paying late? Especially when/if the penalty is negligible.
The answer is a non-impressive credit report showing poor score and resulting difficulties in securing loan from a lender. Your credit report documents your entire credit history – the good things and the bad things. Late payments are among the bad things. Your credit rating will bear the brunt. The most outrageous thing would be penalty APR. APR stands for annual percentage rate. The penalty APR is generated against late payment. It can range between 20% and 35%. Combined with negative impact on your credit rating, penalty APR causes a snowball effect, which results in the loss of thousands of dollars. To know about penalty APR, click here.
The discussion above shows forgetting to pay on time comes with consequences. So millennials, don’t be forgetful. Clear your dues on time. And don’t just pay the minimum amount, clear the entire amount.
Closing the card
Yet another mistake made by millennial men and women. Many of them close a card without a good reason. Closing an account makes no sense. There are two ways an account could be closed; the credit card issuing company can close it and so can you.
What happens when you close your credit card?
It increases your credit utilization rate, which hurts the FICO score. Your aim should always be using the card to improve the score.
The question is why some millennials close their credit cards.
They do that because they are squeamish. If they feel the card is no longer required, they close it, often without thinking of the consequences. In this context, consequences mean negative stains on the credit report and a poor FICO score.
Many millennials close cards with outstanding balance. Per the FICO formula, the account is included when utilization rate is calculated. This is how credit utilization rate keeps accruing. But if the outstanding balance is zero, then one might go ahead with closing the card. Most millennials, however, don’t have the patience to wait till the outstanding balance comes down to zero, which is a mistake.
Succumbing to rewards
Credit card companies regularly customers about new offers. While boomers hardly pay attention to incoming messages announcing promotional offers on a card, millennials often fall for them.
That’s a mistake.
The perks that the promotional offers claim to offer include
- Travel deals
- Dine-out offers
- Online shopping discount
- Cashback on purchase
All of us who have credit cards are familiar with these perks, aren’t we? The truth is, these are tempting. Very tempting to be correct. Millennials are often lured by these offers. What remains hidden from them is the extra cost that such rewards invite. Additional fees get added to an already high interest rate.
Millennials struggling with a not-so-good FICO score should ignore these offers. Besides, most cashback offers apply only when one’s purchase volume hits a certain limit. What’s the point of buying unnecessary stuff just to avail 5% cash back?
None. Millennials need to understand this and stay away from these glittering offers?
True, millennials make a lot of mistakes. But the good thing about them is they admit these mistakes and rectify them. Having that in mind, I really hope that they will pay attention to the mistakes discussed here and stop committing them.
Tina Roth is a personal finance blogger and loves to write about money saving tips. You can visit here personal finance blog to find more about her works. You can reach her on twitter at @ProFinanceBlog.