Economy

Why Young People Are Slowly Breaking Up with Credit Cards

April 9th 2015

By:
Laura Donovan

It looks like student loans and fear of credit card debt have driven Millennials into the arms of prepaid debit cards. A new survey conducted by TD Bank found 33 percent of Millennials ages ages 18 – 34 have used a reloadable prepaid card over the past few years compared to just a quarter of Americans at large. For those Millennials who haven't opted for a reloadable card yet, 60 percent said they'd consider it.

"Millennials quickly adapt to new tools and technologies that help them manage money more efficiently," said Tami Farrow, head of retail deposit payments at TD Bank. "We know from our continued research that Millennials favor debit cards and want to avoid overspending. Prepaid cards provide all the flexibility of a debit card, but with the added control of only spending what you load."

Farrow added in an interview with CNBC that prepaid cards are "much more mainstream than many people think" and not simply for those with terrible credit. Sixty percent of surveyed Millennials argue prepaid cards are great for keeping track of purchases and remaining on a budget. Millennials also don't have to endure the headache of a credit check when applying for prepaid cards.

Why young people are skeptical of credit cards.

Last year, Bankrate found more than half of Millennials don't have credit cards, which David Pommerehn of the Consumer Bankers Association told Bankrate was a product of growing up "in a world where the economy was tanking."

"I don't really feel like there's a need for one in the way I live my life," Melissa Pileiro, a 24-year-old New Jersey resident, told Bankrate. "The idea with a credit card is you're essentially putting money down that you don't have."

Monthly credit card bills add extra stress for Millennials with other big expenses to prioritize.

"It's a relief to not deal with paying a credit card bill every month, especially when I'm just beginning to enter the not-so-wonderful world of repaying student loans," Jamie Primeau, a 23-year-old resident of New Jersey, said to Bankrate. "Basically it's one less thing to worry about."

The ease of prepaid cards.

"Millennials like the convenience, the simplicity and the predictability of the cards," Farrow said of TD Bank's survey results.

Another survey found more than half of prepaid cards don't require monthly fees, and those with fees in place allow them to be waived if a certain amount of money is put on the prepaid card. Many prepaid cards do have activation fees, which can be up to $9.95, according to Bankrate.com. The survey also revealed 16 percent of customer service calls still have charges. It's an improvement from 27 percent in 2014, but costs here and there can add up.

Good and bad prepaid packages

In 2013, Consumer Reports declared American Express's Bluebird direct deposit prepaid card to be the best deal as it had no monthly, activation, or card replacement fee. One of the worst prepaid cards was MetaBank's AccountNow Gold Visa Prepaid Card, which had a $9.95 monthly fee without a waiver, a $10.00 card replacement fee, and a reload fee of up to $4.95.

While prepaid cards might help young people to better manage their spending habits and not buy things they won't be able to pay off later, they're not without major flaws. According to NerdWallet, they rarely end up being less expensive than checking accounts. In 2012, NerdWallet found the average prepaid debit card cost $300 annually before activation and cancelation fees. American Express Bluebird had the cheapest annual costs of the bunch:

Prepaid cards

Nerd Wallet

With piles of student debt and underwhelming economic times keeping them down, it's understandable that Millennials might not want to add to their financial woes by going into credit card debt. When using prepaid cards, however, young people miss out on the opportunity to establish secure credit (although some prepaid cards do allow users to build credit), which they'll want when they're ready to buy a house or make another big purchase someday. That day might not be soon, but it never hurts to plan ahead and reap some rewards from spending along the way.