Do Young People Get Bad Credit Card Rap?

If you are 30 or older, chances are good that you think young people typically make poor decisions with their credit cards.

In fact, that belief is so widespread that a provision in the Credit CARD Act of 2009 prohibitspeople younger than age 21 from getting a credit card unless a parent, guardian or spouse co-signs, or the young person has proof of sufficient income.

However, such stereotypes may be off the mark, according to the findings of a study co-sponsored by Arizona State University and the Federal Reserve Bank of Richmond in Virginia.

Although young people do experience slightly more minor delinquencies on their cards, they are far less likely to have serious delinquencies than their elders, according to Andra Ghent, assistant professor at the W. P. Carey School of Business at Arizona State University in Tempe.

Ghent explains the study's findings in the following interview.

In your opinion, what are the most significant findings in this study?

The most significant finding is that people under 21 are less likely to have a serious default on their credit cards than people over the age of 21.

The second important finding is that, regardless of their current age, the types of people who get a credit card early in life -- what we term the selection effect -- have fewer serious defaults than the types of people who wait until later to get a credit card. Finally, we don't find any evidence that earlier entry into the credit card market leads to more credit problems later in life.

The stereotype is that young consumers (ages 18 to 25) generally are more irresponsible than older consumers. Yet, this study indicates that young people are less likely than older borrowers to default on their credit cards. Does that surprise you?

It did surprise us. Since previous studies have shown that young people have lower financial literacy than older people, we expected to find that young people default more than older people.

However, it seems that what matters most is not the financial literacy of the entire population of young adults, but rather, the financial literacy of the young people who are actually using credit cards.

To be clear, young people did experience slightly more minor delinquencies (30 or 60 days past due) on their cards, but far less serious delinquencies (90 days or more past due) than their elders. It appears the young credit card users may have learned from the minor defaults and moved on, avoiding major credit card problems in the future.

You mention that consumers who get credit cards early in life are more likely to avoid big credit card problems in the future. They also are more likely to be able to get a mortgage, and to buy a home at a young age. How did you determine all of this?

To ascertain the relationship between age and default, we simply looked at the relationship between age and default using credit bureau data, after controlling for differences in macroeconomic conditions and where the individual lives.

What we were also able to do was look at the people whom the CARD Act actually delayed in getting a credit card. That is, we look at people who got their first credit card at age 21, but who would have gotten a credit card earlier if not for the CARD Act. We compare these people whose entry into the credit card market was delayed by policy with people who first got their credit cards at age 21 before the act passed.

We then look at the differences in the default behavior and likelihood to get a mortgage at age 22. The surprising thing is that the sorts of people who, in the absence of the act, would have gotten a credit card early in life actually default less and are more likely to get a mortgage.

We don't know exactly why early entrants into the credit card market are generally better borrowers. We suspect that it is partly because more financially literate individuals participate more in financial markets. In the credit card market, this likely means that it is the most financially literate borrowers who enter early.

Do you think today's young people are more likely to be good credit risks later in life than young people of previous generations?

We can't say anything about how today's young people compare with young people from previous generations. We would need data from many years earlier to look at this and, unfortunately, we just don't have the data.

Given the results of this study, what do you think it says about the wisdom of the Credit CARD Act of 2009? Do you think the legislation is causing more harm than good?

Our study addresses only the provision of the act that restricts credit to people under the age of 21 (Title 3), which is quite distinct from the other provisions of the act.

Research by other people on other provisions of the act seems to suggest the CARD Act has saved borrowers money, and there is not much evidence that the restrictions on lenders have made it excessively difficult for people over the age of 21, or have led to increases in interest rates. Thus, some provisions of the CARD Act appear to be beneficial.

Are there any changes you'd like to see in public policy in light of these study results?

Our findings highlight the importance of careful consideration of any provisions of consumer credit law.