Despite the commonly held belief that young adults are less responsible with their finances, a new study finds college-aged credit card users are less likely to default than middle-age borrowers.
The study, conducted by Arizona State University's School of Business and the Federal Reserve Bank of Richmond, found that credit card users between the ages of 18 and 25 are not only the least likely to have a serious default on their cards, but they are also more likely to be good credit risks later in life.
"Young borrowers are the least experienced financially and, conventionally, thought to be most prone to financial mistakes," says the study, published on Monday. "Our results challenge the notion that young borrowers are bad borrowers."
The authors of the study argue that part of the Credit Card Accountability Responsibility and Disclosure Act of 2009 may have been unnecessary.
The majority of the legislation, known as the Credit CARD Act, took effect in February 2010 and made it illegal to issue a credit card to anyone under the age of 21, unless that person had a cosigner or could submit evidence of an independent ability to pay the bills.
The act also included provisions that significantly restricted the marketing practices of credit card companies on college campuses. Before the legislation was passed, college students would use easy-to-get credit cards to finance their education while racking up large amounts of debt.
Now, credit card companies cannot solicit users within 1,000 feet of a college campus or at any college events.
Although the legislation was intended to protect young adults from predatory practices among some credit card companies, the study's authors argue allowing college students to apply for credit cards might make sense.
"These students are the people who want credit, need to build up a good credit history, and have a steeply sloped income profile," said Andra Ghent, an assistant professor at Arizona State and an author of the study. "If they don't have a student loan, then a credit card may be the only way they can establish a decent credit history."
The researchers did find, however, that people in their early 20s are more likely to experience minor delinquencies that occur from failing to make payments for 30 or 60 days, which is likely attributable to their propensity to make financial mistakes because of poor financial literacy.
But financial illiteracy does not appear to be the main cause of serious delinquencies, the researchers found, because serious default peaked among middle-age borrowers.
A borrower between the ages of 40 and 44, for example, was 12 percentage points more likely to experience a serious default than a 19-year-old borrower, and 13 percentage points more likely than someone over the age of 65.
The researchers argue that it is important that young adults have the opportunity to apply for and use credit cards to learn how to responsibly manage their finances, through automating bank payments, consolidating credit cards and organizing their financial documents.
"You can't learn by just watching credit card use," Ghent said. "You have to get a card, pay it down every 30 days, and experience, in order to learn. It's also hard to get a mortgage if you can't get a credit card to build up your credit history."