Charlie Frohne never wanted a Visa or MasterCard, afraid of incurring debts he couldn't repay. As the 30-year-old searched for a Manhattan apartment, he found landlords treated his lack of a credit history as a liability.
His experience highlights a growing reluctance among young adults to use plastic for everyday purchases.
Thirty-nine percent of undergraduate students between the ages of 18 and 24 owned a credit card in 2012, down from 49 percent in 2010, a Sallie Mae and Ipsos Public Affairs survey found. And young adults who do have credit cards are carrying smaller balances: a median of $1,600 in 2010 compared with $2,500 in 2001, according to Federal Reserve data.
The trend, rooted in stricter lending rules and weaker job outlooks for young Americans since the 2008-09 recession, has implications for the strength of the economy. As people in Frohne's age group eschew plastic, fewer are building the credit histories that would help them to gain financing for purchases of homes and cars that are critical to economic growth.
“You could say that they're not going to get mortgages, and that could have dire economic consequences,” said Ann Schnare, a consultant in the mortgage industry and who formerly worked as vice president of housing economics and financial research at Freddie Mac in McLean, Va.
“But that assumes a static model. I think that the industry will respond.”
Credit bureaus and the lending industry are stepping up their search for new ways to bolster credit files. As reporting agencies gather data from telephone, rent and other payments, some scoring models incorporate it to help assess candidates' creditworthiness.
“If the only way to get credit is to borrow, young people are going to be slower to borrow. It is circular,” said Rachel Schneider, senior vice president of insights and analytics at the Center for Financial Services Innovation.
Credit card borrowing has been shrinking across all age groups since the recession, but the decrease has been marked among consumers younger than 35, a Pew Research analysis released last month found. Credit card use for young people began declining prior to the recession and between 2007 and 2010 dropped 20 percent, based on the Pew findings.
That could be partly the result of a 2009 law that made it more difficult for credit card companies to market and distribute cards on college campuses, said Brannan Johnston of credit bureau Experian Plc.'s RentBureau division.
Scarce job opportunities for young adults also play a role. Unemployment for those ages 20 to 24 stood at 13.1 percent in February, up from 7.4 percent in February 2007.
“There's a greater awareness among young people about the risks of borrowing when job prospects are lower,” said Terry Sheehan, an analyst with Stone and McCarthy Research in Princeton, N.J.
Regardless of the cause, a generation of credit-averse consumers could weigh on the economic recovery.
“Given the trends in credit usage by younger Americans, I think there will be a growing number of Americans who are credit-invisible,” said Michael Turner, CEO of the Policy and Economic Research Council, a Durham, N.C.-based nonprofit that researches ways to extend credit to those who lack it.