Credit card and higher interest: Young adults are particularly vulnerable

Don’t worry if you see people in Pakistan hesitant to use or even hate credit card, especially amid higher interest/charges, alarming inflation and reduced purchasing power. It is not phenomenon not just limited to us as people across the globe are struggling to cope with it.

Take the US as an example where the people across the board are struggling with credit card debt with those just starting out are particularly vulnerable.

However, the young adults are the most vulnerable group. The reasons? It is a combination of limited financial resources, lower wages and shorter credit histories as they are finding it difficult to manage high-interest debt more than other age group.

These findings are revealed in a report prepared by Urban Institute says nearly one in five adults between the ages 18 and 24 with a credit record in the US currently have debt in collections.

It noted that the high cost of borrowing coupled with limited income makes it difficult to manage debt in this stage of life.

Overall, credit card balances are surging, up 15 percent in the most recent quarter, the largest annual jump in more than 20 years. At the same time, credit card rates are now over 19 percent, on average — an all-time high — and still rising.

It is an obvious consequence as when you have poorer credit, you have to pay more to borrow, which can make taking on debt even harder to pay back.

“Because young adults have this unique vulnerability, it’s easier for a financial shock to happen and throw you off your path,” the report said. 

Minorities

The report also notes that those living in communities of colour are even more likely to struggle with credit and hold past-due debt.

Young adults in majority-Black and majority-Hispanic communities have nearly twice the rate of credit card delinquencies as young adults in majority-white communities.

These young adults also have lower average credit scores than their white counterparts and they are more likely to see their credit scores deteriorate over time.

“Disparities by race and ethnicities emerge from this legacy of constrained access to wealth building pathways,” says Urban Institute.

Easy credit options can be a trap

The Credit CARD Act, which passed in 2009, restricted card companies from issuing credit to new, young customers unless they can demonstrate the ability to make payments or have a co-signer.

And yet, “young people, and college students in particular, still receive unsolicited preapproved credit card offers,” the report found.

Further, younger consumers are increasingly turning to buy now, pay later payments. “An attractive alternative to credit cards, BNPL products offer quick credit approvals and little to no interest,” the report said.

However, the more buy now, pay later accounts open at once, the more prone consumers become to overspending, missed or late payments and poor credit history, other research shows.

Meanwhile, credit cards are still considered the best way to begin a credit history, which is important to young adults just starting out.

Good credit paves the way to low interest rates on mortgages and auto loans and can even make it easier to get an apartment rental.

The best way to improve your credit comes down to paying your bills on time or reducing your credit card balance.

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