Debunking the Young Debtor Stereotype

The author of Strapped calls credit cards a "necessary evil" in today's economy.

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In Strapped: Why America's 20- and 30-Somethings Can't Get Ahead, Tamara Draut points to some disturbing facts: Young people today earn less than their parents' generation did, on average, and also carry more debt. In 1980, the average salary for men with high school diplomas between ages 25 and 34 was $38,800, according to the Education Department. In 2005, it was $29,600. The average salary for the same age group for both men and women and across all education levels has also declined, from $35,600 in 1980 to $32,800 in 2005. (All figures are in constant 2004 dollars.) Meanwhile, consumer debt has ballooned. In 1983, median consumer debt for 25-to-34-year-olds was almost $4,000; by 2001, the median consumer debt for households under 35 was up to $12,000, as measured in constant 2001 dollars. "Living paycheck to paycheck is the new norm for young adults," she writes.

Draut speaks from personal experience: At age 30, she and her husband struggled with $57,000 in student loan debt and $19,000 in credit card debt. Six years later, the credit card debt is paid off, and they are down to $30,000 in student loans. She spoke with U.S. News about the state of young people and their credit cards.

You write that 20- somethings are stereotyped by older generations as overspending on unimportant indulgences, which is why they have credit card debt. But you say that stereotype is inaccurate and that today's young adults go into debt just to pay for essentials. Can you explain that?

For many 20-somethings, credit card debt has become a necessary evil. The typical young person starting out today is earning less than their parents did at this age, yet housing and healthcare costs are much higher. In addition, this generation is much more likely to have student loan debt—nearly $20,000, on average. All of these economic circumstances mean less cushion in the monthly budget, and so credit cards often become a safety net. In a household survey commissioned by Demos, the top reasons young people cited for their credit card debt were car repairs, job loss, and home repairs. In addition, 45 percent of low-to-middle-income young people with credit card debt reported using their cards to pay for basic living expenses, such as rent, groceries, and utilities, because they didn't have enough money in the bank to cover those costs.

You also point out that credit cards are much more widely available now than 30 years ago. Would it be better if lenders made credit less available? In other words, should it be harder for some people to get credit?

Access to credit is essential in today's modern economy, so it's vital that all individuals have access to credit at fair and reasonable terms. The problem is that the lending industry has been steadily deregulated, leaving consumers unprotected from capricious changes in terms and high fees and rates.

Is the marketing that credit card companies do on college campuses, or some aspects of it, unethical? What do you think crosses the line?

I believe marketing on college campuses has gotten out of hand. I do think college students should have access to credit cards but that they should be able to make the decision to get a credit card in an informed way. I draw the line with credit card companies offering free stuff to get students to sign up for credit cards and offering students with little or no incomes a big credit line they could not reasonably be expected to afford. As you know, Congress is now considering making reforms in the credit industry, including increasing disclosure about fees and limiting when card companies can raise interest rates. What would you like to see Congress do?

Congress needs to fill what has become a giant vacuum in consumer protection. Right now, credit card companies have the right to change the terms of your account at any time, for any reason—which leaves borrowers completely unprotected from capricious changes in terms. Congress needs to enact some common-sense rules for the industry, such as prohibiting card companies from doubling or tripling the interest rate for minor infractions such as a payment that arrives a day late. Congress should also prohibit retroactive rate increases—the practice of applying a higher interest rate to an existing balance, essentially raising the cost of every item previously purchased with the card.