In personal finance, credit cards usually get a bad rap. And little wonder: they enable people to dive deep into consumer debt that is difficult — and expensive — to repay. Interest rates of 15 to 20% aren’t uncommon, and that’s on top of a number of other fees and charges you may face.
But problems with credit cards go beyond accusations that they’re easy gateways to massive amounts of debt. A number of data breaches in the last few years shows that there’s a huge issue of privacy and security that has many consumers feeling spooked. And credit cards are often a hassle to use for things like online purchases.
Credit card companies themselves face a problem that’s bigger than just a potentially outdated and increasingly unpopular product. Due to the financial turmoil caused by the Great Recession and the subsequent fallout, many consumers simply don’t trust the old guard of financial services. Instead, they want more transparency and greater flexibility — two words that are hardly synonymous with credit card giants.
And financial services are taking notice of shifting trends. Many companies are changing to accommodate the growing demand from a new generation of consumers, specifically Generation Y.
The Millennial generation is forcing a change
Credit cards are a recently new phenomenon. The first “general purpose” credit card was introduced in 1966. Now, nearly 50 years and just two generations later, Millennials consider credit cards old-school, outdated and uninteresting. What changed?
This group, ages 16 to 36, practices spending habits that are throwing many of those “old-school” credit card companies for a loop. Firmly entrenched brands in the industry are looking at an adapt-or-die scenario because of the new needs and behaviors of younger consumers.
The Millennials aren’t necessarily more financially-savvy than other generations. They also deal with credit card debt, are extremely burdened by excessive student loans, and seem to be lagging behind where they need to be for financial success. The average net worth of Gen Y is about $10,000. Only 55% save for retirement and 82% of those who do put away 10% of their income or less.
But they are different. They’re financially skeptical, and don’t trust big-name players that have long held sway in the industry. One in four say they don’t trust anyone for financial advice. Sixty-three percent don’t even have a credit card. They’re also digital natives – part of the first generation to grow up with the Internet and other technology as part of the landscape (not a later-in-life addition to it). They are demanding that their financial lives be just as technologically advanced as they are.
This combination of preferences and behaviors means Millennials want new and better ways to use financial tools like credit. Credit cards just don’t cut it — but that doesn’t mean Gen Y is against using credit entirely. They’re seeking new options that cater to their desires and their needs.
New options for smarter credit
While most Millennials don’t have credit cards, that doesn’t mean they’re not utilizing credit. PayPal recently reported that Millennials are the fastest-growing segment of shoppers who use its PayPal Credit option; 33% of credit users are Gen Yers, up from 28% two years ago. Their survey also showed that Millennials were most likely to use online credit to purchase clothes, technology and travel.
PayPal Credit is a line of credit that consumers can apply for and receive near instant approval. It does share some characteristics of traditional credit cards; there is an APR for users who choose to carry a balance and there are late fees for consumers who fail to pay their balance on time.
But the service integrates smoothly with a number of places to make purchases online and makes the process of buying via technology much easier. Users can connect their line of credit with their PayPal account and pay bills with the balance in that account or through their bank account. And on qualifying purchases, PayPal offers a grace period where users can enjoy no payments, with no interest, for 6 months.
PayPal is an example of one of the new options for smarter credit that younger generations (and tech-savvy shoppers of all ages) want to see from financial services. They’re technology-based and responsive to the desires of consumers who want more transparency in their shopping experiences, and allow Millennials more flexibility in how and when they pay.
Other companies are catching on to the trend, too, and providing new options for those who shun credit cards and want alternatives. Affirm is a tech startup founded by a former PayPal bigwig, Max Levchin. The company offers a service that allows consumers to pay for purchases they make online in installments. And more and more businesses are offering lines of credit from banks they partner with, allowing customers to finance big purchases with better terms than they could secure with credit cards.
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