1 in 5 Young Adults Have Debt in Collections, New Report Reveals Vulnerability to Delinquencies

People in the United States are having difficulty managing their credit card debt. Young adults who are just beginning to build their financial foundation are especially susceptible to this issue.

A recent report by the Urban Institute has revealed that young adults are having a particularly difficult time managing high-interest debt due to their limited financial resources, lower wages, and shorter credit histories. It was found that nearly one in five adults between the ages of 18 and 24 with a credit record in the U.S. have debt in collections.

The authors of the report noted that young adults are especially susceptible to financial hardship due to the high cost of borrowing and their limited income. This makes it difficult for them to manage their debt during this period of their lives.

The amount of credit card debt is increasing rapidly, with a 15% rise in the most recent quarter, the largest annual increase in two decades. Simultaneously, the average interest rate on credit cards is now at an all-time high of 19%, and is still climbing.

For those who are applying for credit for the first time, the annual percentage rate (APR) is usually higher, sometimes as high as 30%, according to Ted Rossman, a senior industry analyst at Bankrate and CreditCards.com.

Kassandra Martinchek, a research associate at Urban Institute and co-author of the report, noted that those with lower credit scores often have to pay higher interest rates when taking on debt, making it more difficult to pay back.

Martinchek noted that due to the special susceptibility of young adults, it is simpler for a financial setback to occur and disrupt their plans.

People who reside in minority neighborhoods are more likely to experience difficulty with credit and have overdue debt.

According to research conducted by the Urban Institute, young adults in communities with a majority of Black and Hispanic individuals have a rate of credit card delinquencies that is nearly double that of young adults in majority-white communities.

A separate analysis conducted by the Urban Institute, based on Vantage scores, has revealed that young adults of color have lower average credit scores than their white peers. Furthermore, these individuals are more likely to experience a decline in their credit scores over time.

Martinchek noted that the legacy of limited access to wealth-building opportunities has resulted in disparities between different racial and ethnic groups.

In 2009, the Credit CARD Act was passed, which limited credit card companies from providing credit to new, young customers unless they could prove they had the means to make payments or had a co-signer.

The report discovered that young people, especially college students, are still being sent preapproved credit card offers without their request.

A recent survey found that 63% of Americans are living paycheck to paycheck. This is concerning, as it suggests that many people are engaging in risky behaviors that could be causing their credit scores to level off. To avoid getting into debt this holiday season, there are a few tips that can help. These include budgeting, shopping with cash, and avoiding impulse purchases.

Younger shoppers are increasingly turning to buy now, pay later payments as an attractive alternative to credit cards. According to the report, these BNPL products offer quick credit approvals and little to no interest.

Studies have revealed that when consumers open multiple buy now, pay later accounts, they are more likely to overspend, make late or missed payments, and have a negative impact on their credit history.

Rossman warned that while it can be beneficial, it can also be a slippery slope that leads to overspending. He cautioned that it can become a trap.

Martinchek noted that this could be an indication of potential financial difficulty.

Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School, has noted that the BNPL market is currently operating in a state of limited regulatory oversight, existing in what he calls a "legal gray space".

Establishing a credit history is essential for young adults just beginning their financial journey, and credit cards are often seen as the best way to do so.

Having a good credit score can be beneficial in many ways. It can lead to lower interest rates on mortgages and auto loans, and can even make it easier to secure an apartment rental.

According to Rossman, the key to improving your credit is to make sure you pay your bills on time and reduce your credit card balance.

Rossman suggests that borrowers should be mindful of their revolving debt and keep it below 30% of their available credit to reduce the impact of high balances. Additionally, they can ask for a higher credit limit or make an extra payment during the billing cycle to help manage their debt.