Steve Ashbacher’s college-aged daughter doesn’t like charging things to her credit card, especially when the balance gets high — she’d rather pay cash or debit. She’s learning, though, the importance of paying down her balance regularly, and the value of the spend/repay cycle for building up her credit score.
However, said Ashbacher (vice president, legal services at Unifund), his daughter may be the exception rather than the rule — and it’s not just a case of millennials versus older demographics. Lower unemployment rates have, counterintuitively, not led to lower credit card delinquency rates. In fact, the reality has been just the opposite. Charge-offs are near an eight-year high.
Ashbacher said that greater availability of credit, compared to the recession years, is leading consumers of all ages, incomes and education levels to get in over their heads using credit products. Even folks who make good money, and make it consistently, are living paycheck-to-paycheck and riding close to the monthly maximum on their credit cards, he said. On the other hand, some consumers are playing it safe and avoiding credit altogether, keeping heavier balances in their checking and savings accounts and living cautiously, spending only what they have.
Taken together, Ashbacher said, these two different behaviors suggest the same root cause: Many consumers today just don’t understand how to use credit. There is a baseline of financial literacy that is missing across generations and socioeconomic classes.
He said that Unifund’s CEO, David Rosenberg, believes that the recovery landscape is changing, and seeks to offer consumers opportunities to recover from past delinquencies through mechanisms outside of traditional collection methods. And Ashbacher believes consumers are now at a tipping point where they’re beginning to understand the value, at least, of financial activities like saving money or using credit, even if they don’t fully grasp how to do those things responsibly.
PYMNTS and Unifund recently collaborated on a study to see what trends and connections could be found between financial behaviors around credit and saving, and demographic factors like age and socioeconomic class. In a recent discussion with Karen Webster, Ashbacher dug into the results.
Financial Literacy: Laying the Foundation
Consumer confidence is definitely up, said Ashbacher, as demonstrated by a dramatic increase in spending. Yet, for many, their confidence may have grown by more than their income as they are extended beyond their means, and delinquencies have also gone up.
To Ashbacher, this trend indicates a lack of understanding around the balance of income versus spending. These consumers may not be used to a steady paycheck and have not developed healthy financial habits around saving and paying off credit. As consumers begin to recognize the value of putting funds aside, even if it's just for a rainy day or an emergency, he said they are laying a foundation of financial literacy upon which they may one day build their personal financial wellness. So far, though, this translation has yet to happen.
Consumers must learn, he explained, that having a steady job and a sense of security doesn’t necessarily mean they can just go out and buy a brand-new car. Similarly, having a few bucks in the bank doesn’t make them financially healthy if their credit card is maxed out and they’re paying off a personal loan from their family vacation to Disney World. However, having a few bucks in the bank is a sign that consumers are indeed thinking about their financial wellness, and that’s a critical first step.
No Worries Vs. No Credit: A Consumer Spectrum
The economy has improved, unemployment rates are down and consumers have steady flows of income, which have led to them being offered credit even if they aren’t perfectly prime. This has contributed to the growing near-prime market, Ashbacher said.
In some cases, these customers are responsible about the debt they take on, paying their credit card bills every month so they can continue to enjoy full access to any credit product they want. Ashbacher calls these the “no worries” customers. They tend to have a higher income and level of education and pay their bills on time.
Others may be rebounding from a shock to their financial system — the death of a spouse, the loss of a job, an injury or medical condition that caused them to leave or lose their job — as well as access to credit. Now, back on their feet, these individuals have been given another chance to build their credit back up, because their incomes are at a high enough level to make lenders more comfortable with the risk.
Then there are those who could get credit if they wanted it but don’t want it, in addition to those who want credit but can’t get it — the “shut-outs.” Due to a consistently poor track record, these customers — unable to find anyone willing to take on the risk of extending them a line of credit — are forced to turn to other credit products, such as loans from family members or payday loans, and say they live paycheck-to-paycheck.
Most baffling to Ashbacher are what he calls the “second-chancers” — those whose credit was fine until they experienced that drastic life event that plunged them out of the prime category, into near-prime or even sub-prime. What’s baffling is that these consumers are roughly comparable to the no-worries group of consumers, in terms of education and employment profiles. They once had good financial habits but, for some reason, have gotten out of the practice of being responsible financial citizens.
Instead, second-chancer behavior tends to more closely resemble shut-out behavior. They’re educated and affluent but are chronically late with payments, leading them to face the same paycheck-to-paycheck struggle as the shut-outs.
“That’s the most head-scratching thing,” Ashbacher said. “They’ve got their stuff together, but they’re still claiming to live paycheck-to-paycheck.”
He added that many are realizing it’s smart to have a rainy-day fund, but in terms of saving up for major purchases like a vacation, a car or electronics, these groups just don’t seem to be thinking about it.
It’s at Least a Little Bit About Millennials
There’s no denying that attitudes toward financial activities, like credit and savings, are shifting with the generations. Some of that, Ashbacher noted, is a sign that teens and young adults need greater financial education and literacy — an onus that he said falls on the generations that have gone before them.
He calls millennials the “YOLO generation” — that is, “you only live once.” Life is short, and these kids have been weaned on the instant gratification of Amazon Prime. Why delay getting what they want?
Putting money away to support future spending, such as retirement or sending children to college, can be difficult for the younger generations to grasp. These events are far away and are no guarantee for this demographic, which is delaying parenthood or foregoing it altogether. As for retirement, it was a thing their parents did, but it may be a luxury that millennials can’t see themselves ever being able to afford, he said. Besides, if they ever need a quick buck, now or later in life, there’s always the gig economy.
As life expectancies continue to grow, Ashbacher said, so does the age at which workers will become eligible to stop working and live off their pensions. This may be driving younger generations to care less about saving up for their “golden years.” Why bother if they’ll probably just work forever?
The Potential for Gamification
Helping consumers find their way to better financial wellness is a complex problem, no matter where they fall on the spectrum. Ashbacher said that gamification may be one possible key to transforming this budding financial literacy into true financial wellness. By turning responsible spending, saving and borrowing into a game, complete with points and rewards, people could become curious to see how well they’re doing. So, they’ll check the platform to see their credit score and note how different activities affect it.
Even better if they can run hypothetical scenarios through a platform before spending or charging any real transactions. What will happen to their credit score over the next three months if they make a late payment or miss one? What will happen if they pay it down completely?
Instead of doing it and then seeing the consequences, Ashbacher said a good tool should give consumers a chance to see how different scenarios play out, risk-free.
Just as Ashbacher’s daughter is learning that charging and paying off credit is a healthy financial habit that benefits her, consumers in general can learn through the positive reinforcement of gamification which behaviors are smart and healthy financial choices, and which ones aren’t.
Today, it’s a game — tomorrow, hopefully, those healthy financial habits become internalized.