Here's What Millennials Are Doing Right -- and Wrong -- When It Comes to Credit

Millennials are making some good decisions when it comes to credit cards, but also some bad ones. Here's where millennials are going wrong, and what they're doing well.Image source: Getty Images.

Credit cards can be a helpful tool to earn rewards and build your credit, but they can also be an albatross that ruins your financial life if you use them the wrong way. Unfortunately, many people of all ages make mistakes with credit cards that end up costing them -- including millennials. 

But the good news is, many in the younger generation have learned from the errors of their older peers and are avoiding some of the common credit card mistakes they made. In fact, there's a lot that millennials are doing well when it comes to credit cards -- even though they aren't perfect. 

Millennials are in debt -- but not as much debt

The bad news is, millennials -- like almost all other Americans -- are carrying credit card debt. In fact, in a recent study, The Ascent found a total of 60% of all Americans were carrying credit card debt. 

But, while they're indebted, millennials don't owe as much as their older counterparts -- and not quite so many millennials are making the mistake of owing money on their cards. Just 56.7% of millennials have credit card debt, compared with 67.6% of Gen Xers and 65.6% of baby boomers. Those millennials who do owe also owe less, with an average of $5,453 in debt compared with $6,627 for Gen Xers and $6,800 for baby boomers. 

Millennials are less likely to use balance transfers

While millennials are handling credit card balances in a smarter way by keeping their balances lower, they're less likely to use a helpful tool to reduce credit card interest: balance transfers. 

Just 32.6% of millennials reported using a balance transfer to consolidate debt, compared with 46.1% of Gen Xers and 50.8% of boomers. Unfortunately, by shying away from balance transfer cards, young people may be missing out on an important opportunity to lower their interest costs and become debt-free faster.

Balance transfers are simple and easy to do if you can qualify for a balance transfer card with a 0% promotional rate, and often transferring a balance is free if you can find a card without fees. While you need a plan to pay off the balance before the 0% rate expires and your interest costs rise, millennials should strongly consider exploring this option to help them tackle the credit card debt they do have. 

Millennials may be too focused on rewards rather than APR

Many millennials see credit cards as a tool to earn rewards. In fact, millennials were more than twice as likely as baby boomers to care about bonus offers -- including rewards and cash back -- compared with baby boomers.

This can make sense if you're going to pay off the balance in full every month -- but remember that the majority of millennials do carry some credit card debt. If you're going to owe money, you need to make APR the top priority because no rewards points can make up for a high interest rate. One reason baby boomers may be 39% more likely than millennials to care about APR is that boomers are twice as likely to actually understand what APR means compared with their younger counterparts.

APR, or Annual Percentage Rate, is the cost you pay to borrow -- including fees and interest. If you don't understand what APR means, you need to learn before you pick a card. And if think you will carry a balance, look for the lowest APR possible even if you have to sacrifice rewards to do it. 

But millennials are using cards for the right reasons

While millennials may be focused on the wrong thing when picking a credit card, they've got the best reason of any generation for using cards. Almost 72% of young people report they own a card to build their credit history, compared with 58.2% of Gen Xers and 39.3% of boomers.

Using cards to build credit history is the single smartest reason to get a credit card. When you have a card and make payments on time every month, this boosts your credit score. And if you keep your credit utilization ratio below 30% (or as low as possible), this also helps you earn a good score. Building credit can make all your loans more affordable in the future and a good score is the foundation for a solid financial life. 

There's room for improvement -- but millennials are doing a lot right

While millennials should focus on paying down debt -- and looking for a low APR or transferring a balance to help do so -- they have the right idea about using credit. But it's important to remember that you don't need to carry a balance to build credit and that keeping your balance low is key to getting the best possible credit score.