Americans across the board are struggling with credit card debt. Those just starting out are particularly vulnerable.
With limited financial resources, lower wages and shorter credit histories, young adults are struggling to manage high-interest debt more than other age group, according to a new report by Urban Institute. Nearly one in five adults between the ages 18 and 24 with a credit record in the U.S. currently have debt in collections.
"Young adults are particularly vulnerable," the authors of the report wrote. "The high cost of borrowing coupled with limited income makes it difficult to manage debt in this stage of life."
Overall, credit card balances are surging, up 15% in the most recent quarter, the largest annual jump in more than 20 years. At the same time, credit card rates are now over 19%, on average — an all-time high — and still rising.
But for new applicants for credit, APRs are typically even higher, as much as 30%, according to Ted Rossman, senior industry analyst at Bankrate and CreditCards.com.
"When you have poorer credit, you have to pay more to borrow, which can make taking on debt even harder to pay back," said Kassandra Martinchek, a research associate at Urban Institute and co-author of the report.
"Because young adults have this unique vulnerability, it's easier for a financial shock to happen and throw you off your path," Martinchek added.
Minorities face greater financial distress
Those living in communities of color are even more likely to struggle with credit and hold past-due debt.
Young adults in majority-Black and majority-Hispanic communities have nearly twice the rate of credit card delinquencies as young adults in majority-white communities, Urban Institute found.
These young adults also have lower average credit scores than their white counterparts, according to a separate Urban Institute analysis based on Vantage scores. And they are more likely to see their credit scores deteriorate over time.
"Disparities by race and ethnicities emerge from this legacy of constrained access to wealth building pathways," Martinchek said.
Easy credit options can be a 'trap'
The Credit CARD Act, which passed in 2009, restricted card companies from issuing credit to new, young customers unless they can demonstrate the ability to make payments or have a co-signer.
And yet, "young people, and college students in particular, still receive unsolicited preapproved credit card offers," the report found.
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Further, younger consumers are increasingly turning to buy now, pay later payments. "An attractive alternative to credit cards, BNPL products offer quick credit approvals and little to no interest," the report said.
However, the more buy now, pay later accounts open at once, the more prone consumers become to overspending, missed or late payments and poor credit history, other research shows.
"It's a slippery slope," Rossman said. "Sometimes it can work, but sometimes it ends up being a little bit of a trap and a ticket to overspending."
"That can be an early sign of financial distress," Martinchek also said.
Without much regulatory oversight, the BNPL market currently exists in "a legal gray space," according to Marshall Lux, a fellow at the Mossavar-Rahmani Center for Business and Government at the Harvard Kennedy School.
How to build good credit
Credit cards are still considered the best way to begin a credit history, which is important to young adults just starting out.
Good credit paves the way to low interest rates on mortgages and auto loans and can even make it easier to get an apartment rental.
The best way to improve your credit comes down to paying your bills on time or reducing your credit card balance, Rossman said.
Rossman advises borrowers to keep revolving debt below 30% of their available credit to limit the effect that high balances can have. Asking for a higher credit limit or making an extra payment in the middle of the billing cycle can help.