CHICAGO, IL--(Marketwired - Oct 2, 2014) -
- Survey finds millennials turn to using credit when going on vacation (32%), getting married (29%) or caring for an aging parent (27%)
- Among the Sandwich Generation, credit is the go-to option for buying a car (59%), home renovations (47%) and going to college (74%)
- BMO Economics: despite an uptick in spring, credit card debt in U.S. is generally trending down
A survey of Americans and their credit behavior commissioned by BMO Harris Bank found that millennials and the Sandwich Generation differ in how they plan to pay for major purchases in their lives.
Most Americans (89 percent) plan to take on a major expense in the next five years. For these purchases, 67 percent of millennials will use some form of credit (loan/mortgage, line of credit, or credit card). This compares to 63 percent of 35-54 year olds who would use credit, and 54 percent of those over 55 who would.
Americans were first asked to select which major life purchases they were expecting to make. Buying a car topped the list across all ages:
|Purchase||18-34 years||35-54 years||55+ years|
|Buying a home||43%||26%||17%|
|Buying a car||58%||66%||49%|
|Renovating your home||16%||20%||21%|
|Having a child||32%||1%||< 1%|
|Paying for a wedding||33%||15%||4%|
|Starting a business||12%||9%||6%|
|Going on vacation||47%||47%||48%|
|Going to college yourself||24%||5%||< 1%|
|Sending a child to college||9%||22%||11%|
|Caring for aging parents||16%||27%||14%|
"It's not uncommon to use some form of credit for the major purchases in life. What's most important is having a plan in place before making the purchase of how you're going to pay it off. If it's on a credit card, sporadic, large purchases may harm your credit score by tipping the balance on your credit-to-debt ratio, which should stay under 35 percent. Interest accumulation is another factor to consider," said Alex Dousmanis-Curtis, Head of Retail Banking, BMO Harris Bank. "These considerations can be managed with the right financial planning in place. Often, credit is necessary as we go from one life stage to the next, and using it in the right way at the right time can help with those transitions."
When asked about the use of credit for these purchases, Americans ages 18-34 and 35-54 were equally likely to use credit to buy a home (81 percent), although a slightly higher percentage of millennials said they will primarily use a line of credit versus a mortgage or loan.
Millennials expect to turn to credit more than the other generations for major future purchases. When financing their entrepreneurial goals, 63 percent will primarily use some form of credit. Millennials were also more likely to use credit when paying for a wedding (29 percent).
Although all groups are equally hopeful about taking a big vacation (47 percent for those under 54 and 48 percent among those over 55), younger Americans are most likely to use credit to cover the costs (32 percent).
While there were more respondents in the Sandwich Generation -- the cohort that is simultaneously caring for children and their aging parents -- who cited caring for older parents as a major financial cost, the younger generation was more likely to use credit to do so (11 percent versus 27 percent).
Below is a table depicting who turns to credit for what purchase:
|Purchase Using Credit||18-34 years||35-54 years||55+ years|
|Buying a home||81%||81%||67%|
|Buying a car||53%||59%||39%|
|Renovating your home||46%||47%||35%|
|Having a child||14%||22%||0|
|Paying for a wedding||29%||8%||8%|
|Starting a business||63%||41%||17%|
|Going on vacation||32%||16%||25%|
|Going to college yourself||62%||74%||0|
|Sending a child to college||54%||27%||40%|
|Caring for aging parents||27%||11%||4%|
"Following the Great Recession, consumers have been more cautious in their use of credit cards, despite this method of payment remaining as flexible and convenient as before. There is a greater awareness that credit card loans tend to be more expensive than other forms of borrowing and growing loan balances can quickly escalate. As a result, Americans are showing signs of improved credit behavior, paying off their balances more determin edly and drawing down less of their credit limits," said Michael Gregory, Head of U.S. Economics, BMO Capital Markets. "According to the New York Federal Reserve, total credit card debt peaked above $865 billion at the end of 2008 and, by early last year, it had fallen to around $660 billion -- a near 25 percent reduction in just over four years. While credit card debt rose modestly in the spring, it has been essentially flat in recent years, even as cards in circulation and credit limits have moved higher -- a sign that the caution continues."
BMO Harris offers the following tips for Americans who plan to use credit for major life purchases:
- Balance it out: irregular, large purchases made on a credit card can negatively impact your credit score. It is recommended that credit card users do not use more than 35 percent of their available balance.
- Think big picture: credit card use is one piece of the puzzle in building your credit score. Using a loan or line of credit for major purchases also plays into your rating. Paying down these loans in a timely manner will be beneficial.
- Opt for a low-rates: if you are carrying a balance on a higher rate credit card, consider moving your balances to a low interest-rate loan or line of credit, or a lower-rate credit card.
- Travel smart: using a credit card to pay for a vacation or part of one can be an opportunity to build up rewards points. Certain cards will also provide insurance for travel-related mishaps, like lost luggage.
- Consolidate your debt: if eliminating the debt is not possible in the short-term, amalgamate the debt you do have to minimize interest. If you have too many cards, consider getting a line of credit to help clear the balance.
Survey results cited in this report are from interviews with an online sample of 1,004 Americans c onducted between July 2nd and July 4th, 2014. The margin of error for a probability sample of this size is ± 3.1%, 19 times out of 20.
About BMO Harris Bank
BMO Harris Bank provides a broad range of personal banking products and solutions through more than 600 branches and approximately 1,300 ATMs in Illinois, Wisconsin, Indiana, Kansas, Missouri, Minnesota, Arizona and Florida. BMO Harris Bank's commercial banking team provides a combination of sector expertise, local knowledge and mid-market focus throughout the U.S. For more information about BMO Harris Bank, go to the company fact sheet. Banking products and services are provided by BMO Harris Bank N.A. and are subject to bank or credit approval. BMO Harris® and BMO Harris Bank® are trade names used by BMO Harris Bank N.A. Member FDIC. BMO Harris Bank is part of BMO Financial Group, a North American financial organization with approximately 1,600 branches, and CDN $586 billion in assets (as of July 31, 2014).
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