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Young doesn’t mean delinquent

By Janna Herron ·
Wednesday, December 11, 2013
Posted: 11 am ET

Younger credit card holders aren't worse borrowers than their older counterparts, according to a new study from the Federal Reserve Bank of Richmond.

The somewhat surprising results call into question whether landmark legislation that restricted young people's access to credit cards was even necessary.

The working paper found that people under 21 before the Credit Card Accountability, Responsibility and Disclosure Act was enacted were substantially less likely to be 90 days or more past due on their credit card bills versus older credit card holders.

Consumers who opened a credit card early in life also were less likely to experience a serious delinquency or default than those who got a credit card later. In fact, consumers who used credit cards earlier in life were more likely to buy a home earlier in life and were less likely to have a serious delinquency later in life.

"In summary, we find no compelling evidence that young borrowers are bad borrowers," the study concludes.

That study's findings cast doubts on the reasons behind the CARD Act's restrictions on young people. The act stipulated that anyone under 21 must show the ability to pay their credit card debt by themselves, and it also restricted how card issuers could market their cards on college campuses, all in the name of keeping young people out of debt.

But were young people really in credit card trouble?

Not really, says Eric Weil, managing partner of college market research firm Student Monitor, mostly because young people -- specifically college students -- didn't use credit cards all that often. Before the act, students used credit cards for only 7 percent of their purchases. Debit cards and cash account for 80 percent of their transactions.

(This year, students reported using credit cards for 13 percent of their spending, while cash and debit cards accounted for 81 percent.)

"We didn't really understand why there seemed to be so much focus on young people getting into onerous amounts of credit card debt," he says of the CARD Act.

Weil also noted that of the one-quarter of students who have a credit card in their own name now, only 7.5 percent of them carry an average balance of $500. He compares that with the 70 percent of students who graduate with $30,000 in student loan debt.

He pointed out, too, that students with credit cards have a better understanding of their own creditworthiness than those who don’t.

Looks like young people and credit cards aren't such a toxic mix.

Do you think young people should have credit cards? What is an appropriate age for a credit card?

Follow me on Twitter: @JannaHerron.

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