As credit becomes increasingly available, the amount of credit debt that Americans take on continues to increase. A new study released on Monday shows that the younger generation, those in their 20s and 30s, are taking on much more debt -- an average of $5,689 more -- than the previous generation. It also says that it is taking longer for them to pay off this debt, and projects that many will continue to add credit card debt into their 70s.
"Our projections are that the typical credit card holder among younger Americans who keeps a balance will die still in debt to credit card companies," said Lucia Dunn, co-author of the study and professor of economics at Ohio State University, in her study.
The study -- which surveyed 32,542 people ages 18-85 between 1997 and 2009 -- broke up the data into three generations: Children (born between 1980-84), Parents (born between 1950-1954) and Grandparents (born between 1920-1924). The data showed that Children paid off their credit card debt at a rate that was 24 percentage points lower than their parents, and 77 percentage points lower than their grandparents. Children also owed $8,156 more than their grandparents during the same stage of life.
Dunn believes that because credit is so much easier to get these days, and the stigma around credit card debt has lessened over the years, that the younger generation is more willing to take on credit card debt than their predecessors. The larger debt and slower payment time means that most people in the younger generation will be paying off their credit card debt for the rest of their lives.
So, how can the younger generation be smarter about their credit?
Be smarter about APRs and fees: Most people, especially in the younger generation, don't pay attention to the different rates and fees associated with their credit cards. Sadly, only around 25 percent of college students know how their credit card's late or over balance fees work, and only 15 percent know what their interest rate was.
It's never a great idea to charge more than you can pay off in your next credit card bill, but if you are drowning in high APRs that are adding more to your debt than you are paying off, you should consider a balance transfer credit card. If you qualify, many cards offer a zero percent APR introductory period, which will allow you to pay down your debt without accruing more interest from high APRs.
Make a deal with your credit card lender: Many credit card lenders understand that people may have a hard time paying off their credit cards. Many will work with you to pay down what you owe, whether it be a payment plan or a lump sum payoff.
Most importantly, find out how the lender will be reporting your new terms to the credit bureaus. They can report them as "Not paying as agreed," which can damage your credit score and further hurt your credit situation, or they can report them as "Paying as agreed," which can help your credit score. "Not paying as agreed" does not help your credit, so it is not a good idea to agree to those terms. And make sure to get everything in writing.
Educate yourself on your own credit: Knowing your own credit will help you determine how to best handle your credit card debt. It's a good idea to check your scores and credit report at least once a year, so you know which of your credit accounts are active and to check if any fraudulent activity has occurred. Consider a credit monitoring service if you want to regularly keep tabs on your credit. Bad credit decisions that college students and those in their 20s make not only cause them to rack up more debt at that time, but also hurt their credit scores in the future. This creates a vicious cycle of credit, as that lower score makes future interest rates on things like mortgages higher, causing those people to rack up more debt later in life as well.