Credit card debt: Do millennials have the right idea?

Millennials might actually be the most responsible spenders in Canada, according to a recent survey. BMO found that millennials were the least likely age group to have more than $5,000 in credit card debt and the most likely to pay off their full balance before the summer. However, the study also noted that 81 per cent of millennials have a rewards card—and 41 per cent use it as their preferred method of payment.

Credit card use in itself is not a bad thing; by establishing a credit history, you can start building a credit score that will allow you to take out a car loan or a mortgage. But it’s important not to carry a large balance, and to pay it off as soon as possible, which could be a challenge if you opt to reach for the rewards card before cash or debit.

Millennials are earning less in Canada

If millennials are spending less on credit, it might be due to their lower incomes. A report released this month by Oxfam on youth inequality singled out Canada, noting that Canadians between 25 and 34 years old are earning 64 per cent less than those in their early 50s. What’s more, the youth unemployment rate in Canada is 13.3 per cent, nearly twice the national average. The latest crop of university graduates is carrying an average student debt load of $28,000 and many are struggling to find work. Some millennials opt to live with their parents to reduce their cost of living, but for others, it could be tempting to use credit in order to make ends meet.

How to avoid credit card debt

The key to responsible spending is to know your limit, and stay within it. This is where it helps to have a monthly budget, so you can track all your income and expenses. We would also recommend using cash over credit, so you know exactly how much you’re spending. And you shouldn’t carry more cash than you’re prepared to spend; an empty wallet can be the sign that you’ve reached your spending limit.

However, for the purpose of building a credit history (and earning rewards), some moderate credit card use can be helpful. Here are a few strategies for keeping credit card debt in check:

1.Start off with a lower limit. Although a bank might be willing to offer you a credit card with a limit of $10-thousand or more, you should look at it not as how much you can spend, but how much debt you could potentially accumulate. It’s best to start off with a lower balance that you can repay on a monthly basis, which could be around $500.

2.Apply for a prepaid credit card. One way to build a credit history without overspending is by using a prepaid credit card. You would pay a deposit to get the card, and that amount becomes your credit limit.

3.Make more than the minimum payment. In order to avoid interest, it’s important to pay off your balance on a monthly basis. Making the minimum payment allows interest to accumulate, and you could potentially end up owing more than you originally spent if you’re not able to pay it off promptly.

4.Avoid apps, games and online shopping. New technology that makes it easier to spend also makes it harder to track your payments. It’s best not to sign up for any apps or games that ask for your credit card number. And when online shopping, avoid setting up “one-click” payments. The extra time it takes to enter your credit card and billing information might be enough for you to determine whether you really need to make this purchase.

Based on the BMO survey, all Canadians could do well to follow millennials’ lead when it comes to credit card debt. But take pause before reaching for that rewards card; the points you earn likely won’t make up for the interest you could owe.

What is your preferred method of payment? Join the conversation on Twitter using the hashtags #BDOdebtrelief #LetsTalkDebt