MONEY credit cards

The Spending Mistake that Millennials Are Making

millennial holding credit card
Dimitri Vervitsiotis—Getty Images

Millennials prefer to pay with plastic over cash, a new study finds—but all that swiping may be unravelling their budgets.

Millennials don’t shop like their parents—and increasingly, they don’t pay like their parents either. Studies have already shown that many of them have chucked the checkbook (if they’ve ever had one); and they’re more likely to forego cash as well, a poll released today by found.

Asked how they typically pay for purchases under $5, 77% of people over 50 surveyed preferred cash to debit or credit, while just 48% of people between 18 and 29 use paper money. The fact that millennials are using cards to pay for even such small expenses suggests they’re probably using plastic for most purchases.

And when they’re swiping, this group also uses debit (37%) vs. credit (14%) by a larger margin than any other cardholder group.

What millennials may not realize is that choosing plastic—even if it’s debit—over paper could be costing them.

Research has suggested that we’re inclined to spend more when we swipe. A 2008 study published in the Journal of Experimental Psychology found that physically handing over bills triggers an emotional pain that actually helps to deter spending, while swiping doesn’t create the same aversion. As a result, the study found, cash discourages spending whereas plastic encourages it.

In addition, a 2012 study from The Journal of Consumer Research found that shoppers who pay with plastic focus more on the benefits of the purchase than the price, while those who pay with cash focus on price first. In other words, we’re more likely to make the decision to purchase an item when we know we’ll be charging it.

Further fueling our natural tendencies to spend more with plastic—a.k.a. “the credit card premium”—is the fact that many shops and bars mandate that you spend a minimum amount to use your card. So if you were planning to use the card anyway, you might pad your purchase to get to the minimum required.

All this spending on plastic also can cause you to rack up debt or overdraft fees, if you’re not swiping mindfully. And many members of Gen Y are not, it would seem.

For example, millennials are more likely than any other age group to overdraw their checking accounts, the Consumer Financial Protection Bureau found. About 11% of millennials overdraft more than 10 times a year, and these overdrafts were typically for small purchases under $24 and were paid back within three days. With the median overdraft fee equaling $34, borrowing $24 for three days is like taking out a loan with a 17,000% annual percentage rate, the study found.

Of course, we can avoid paying the credit card premium by just using cash. But if you won’t remember to go to the ATM, at least take a second to close your eyes the next time you’re about to buy something using plastic: Think about the price of the item and how it will impact your bank account. You might even give yourself a 24-hour cooling off period to think over any nonessential purchases.

Avoid overdrawing or getting in over your head in debt by reviewing your bank and/or credit card account online once per day, or by using an app like, which lets you track all your accounts in one place. Also, consider setting alerts at your bank or credit card website to let you know when you’re approaching a certain balance—this can keep your spending in check.


Money 101: How Do I Figure Out My Financial Priorities?

Money 101: How Do I Create a Budget I Can Stick To?

MONEY Ask the Expert

The Best Ways to Access Cash Abroad

Robert A. Di Ieso, Jr.

Q: My 23-year-old daughter will be leaving for France and Spain next week. What is the best and safest way for her to carry money? —K. Bird, Charlotte, N.C.

A: Assuming she’s going for a short time—anywhere from few weeks to several months—her best option will be to carry a debit and credit card issued by an American bank, says John Gower, senior banking analyst at NerdWallet. But she’ll want to be strategic about which institutions she gets these cards from and how she deploys them.

Typically, U.S. banks charge a fee of 1 to 3% of the total transaction amount each time you use a debit or credit card internationally. If you use your debit card to pull out funds from ATMs abroad, you’ll also get hit with an international ATM fee that’s typically around $2, though Gower has seen banks charge upwards of $5. That’s in addition to whatever the ATM you use will charge. So your daughter could be looking at costs of $10 or so each time she takes out $100. This may tempt her to just take out large sums at once, but carrying large amounts of cash through foreign cities isn’t ideal either.

Instead, to cut down on those ATM fees, consider having her open an account with a U.S. bank that has international branches in her destination so she can avoid the international ATM fee. (Citibank is one with many branches overseas.) Or she could open an account with a bank that has international partnerships. Bank of America, for example, is part of the Global ATM Alliance and because of this allows its customers to use their cards at any member banks’ ATMs for free.

Since credit cards offer greater fraud protection than debit cards, Gower recommends that she have a credit card with her as well. The best choice: A card aimed at international travelers that waives foreign transaction fees and has “chip and pin” technology, meaning a microchip is embedded in the card. Because most European countries use this style of card, she will decrease the chances that stores will have trouble reading her card. MONEY likes the GlobeTrek Rewards Visa from Andrews Federal Credit Union, which she can join by signing up for free with the American Consumer Council. This chip-and-pin card has no annual fee and no foreign transaction fees.

If your daughter gets this card, she’d be well advised to use it for her everyday purchases—rather than paying the 3% foreign transaction fee her debit card will charge. Of course, this only makes sense if she’s responsible enough to pay her bill off in full every month.

Does she have plans to be away for quite a while—maybe studying abroad for a year? In that case, she should consider opening an account with a local bank. While there can be hassles involved with understanding another country’s banking rules, she will avoid out-of-network ATM fees and have a debit/credit card that is more universally accepted than an American card might be, says Gower. But she should also keep a U.S. account active in case of emergency, so that someone at home can easily transfer funds to her.

No matter which option your daughter goes with, she’ll want to bring at least two different types of electronic payment. That way if her debit or credit card isn’t accepted by a store or is stolen she has a backup option. She’ll also want to alert her financial institutions prior to departure of where she’ll be going and how long she’ll be there so that the provider doesn’t cancel or halt her card thinking the charges are fraudulent activity.

TIME Companies

P.F. Chang’s Admits Credit Card Data Compromised

The Secret Service and forensics experts are investigating the security threat

P.F. Chang’s China Bistro has announced that credit and debit card data has been stolen from some of its restaurants. The Secret Service alerted the company on Tuesday.

While the Secret Service and forensics experts investigate the security threat, P.F.Chang’s will use manual credit card imprinting system in the continental US, according to a letter posted by CEO Rick Federico Thursday. KrebsOnSecurity reports that cards used at P.F. Chang’s locations between the beginning of March 2014 and May 19 could be compromised.

P.F. Chang’s is the fifth major chain to have its card system recently hacked, after Target, Michaels, Neiman Marcus,and Sally’s Beauty. Data from magnetic strips of stolen cards can sell for between $18 and $140 per card, according to the New York Times.


Should You Opt in for Overdraft Protection?

You can officially say goodbye to that $40 cup of coffee — that is, if your bank doesn’t badger you into paying for it all over again.

Thanks to new Federal Reserve rules, you now can decide what happens when you pull out a debit card to pay for a purchase but don’t have enough money in your checking account to cover it.

Previously, if you didn’t have enough in your account to make a purchase, your bank would generally cover it anyway — at a price.

Swipe for a $3 carton of milk if you only had $2 in the bank, and, without any notice, you’d pay an extra $35 to $40 to compensate for overdrawing your balance. Withdraw $20 from the ATM and the same thing would happen.

Under the changed rules — applicable to new accounts opened after July 1, and effective August 15 for pre-existing ones — attempted debit-card payments with insufficient funds will just be declined, unless users opt into the previously-automatic coverage, which banks liked to call “courtesy overdraft protection.”

The now-optional service — which many banks are spinning as a must-have, you’ll-never-be-able-to-set-foot-into-your-local-deli-if-you-don’t program — isn’t cheap. TD Bank, for example, charges $35 per transaction that overdraws an account more than $5, up to five transactions per day. You pay another $20 if your account balance remains negative for 10 consecutive days.

Interestingly, though the Fed’s new rules are being enacted to protect customers, a poll shows that many consumers would rather pay the fees in order to avoid the embarrassment and inconvenience that accompany card rejections. But what are the alternatives if you want to avoid debit-card rejections without paying extra? has a list of suggestions, and we picked our favorite three:

  • Carry around an emergency pre-paid or alternative credit/debit card that you know has money on it.
  • If your bank allows, tie your savings account to your checking account so that any checking-account debit overdrafts are covered by the money in your savings. There may be fees for the transfer, but they’re likely cheaper than the courtesy overdraft charges.
  • Sign up for text message alerts to notify you if your balance falls below a certain threshold (of course, standard messaging fees would apply here).

If you have other payment options readily available — cash or credit cards, for example — don’t opt in for overdraft protection, advises Greg McBride, a senior financial analyst at Otherwise, you’re setting yourself up for an expensive fee that can easily be avoided, and which you may not even be aware of (since banks don’t necessarily let you know that a transaction is overdrawing your account). If, however, you don’t usually carry around cash or your credit cards are frequently maxed out, McBride says opting in would be a sensible way to save yourself in an emergency situation when your debit card is your only payment option. But the best solution for avoiding the fee might be the most obvious one: “Everyone needs to monitor their available account balance,” says McBride, “so that they can avoid overdrafts.”

Several MONEY staffers say that in recent weeks they’ve gotten a hard sell from their banks, both online and inside local branches, to opt in for overdraft protection. Confusing marketing gimmicks and persistent sales representatives are aimed at making customers aware of the new option – and signing them up. What about you? Will you opt in? Have you experienced incessant pleas to join? Tell us in the comments.


More Money Wednesday Roundup: Copycat Defaults & Worst-Hit Cities

Personal finance from around the Web:

  • In the wake of the credit card law passed last May, understanding all the new regulations that apply to consumers has gotten confusing. A consumer-law professor tries to untangle the legal mumbo jumbo, offering advice in parts one and two. [Bucks]
  • Beer Market: Even St. Patrick’s Day won’t do much to boost lagging brew sales. Turns out Americans are more likely to celebrate the USA by buying a case on the 4th of July than they are when they honor the Irish saint. [CNBC]
  • Is there groupthink at work among “strategic” mortgage defaulters? Recent research shows that borrowers are more likely to walk away when they are underwater on their home if they know someone else who already did. [Los Angeles Times]
  • The Milwaukee Police Department has found itself combating a new hotbed of crime in the cities’ neighborhoods: foreclosed homes. The currently 1,200 vacant properties have become havens for drug dealers, so law enforcement is stepping in to educate residents on how to avoid losing their homes. [WalletPop]

Follow MONEY on Twitter at


Don’t Sweat it: Canceling a Credit Card Won’t Hurt Your Score

As people have vented their wrath at banks for raising the cost of credit cards — higher interest rates, new annual fees and lowered credit lines for a lot of loyal customers — a recurring theme of the discussion is that consumers will end up punishing themselves by closing their credit-card accounts in a fit of anger. As one reader of a post about credit-card fees commented last week,

I think that the system of credit scoring needs to be addressed. The banks and credit card companies are abusing the current scoring system. They know that that if the account is closed the consumers score will go down and that is something the consumer will not want.

After all, these scores are used not only by lenders to determine whether they’ll front you money and how much interest they’ll charge, but also by a lot of other people who want some insight into your trustworthiness: Auto-insurance companies, for starters. Potential landlords. Companies thinking about hiring you.

But is this a real problem?

Will indeed your credit score drop if you tell your card issuer to stick their plastic somewhere other than an ATM? Part of the problem is that the methodology of determining your credit score is a secret formula held by FICO, a.k.a. Fair Isaac, the company behind the most widely-used credit scoring system in the US. Yes, they do explain the ingredients of that formula in general terms. Getting the nitty-gritty numbers, however, is like asking Coca-Cola for their secret recipe: They’ll admit it contains “natural flavors,” but don’t expect much more information than that.

Yet FICO was able to shed some light on the question. The most important point made by spokesman Craig Watts is that it’s a myth that if you close a credit-card account, all trace of it disappears from your credit score. In fact, he says, the credit agencies from which FICO draws information used to calculate your score hold on to payment history for years — the positive stuff for about a decade and the negative stuff usually for seven years. That information is used to calculate two parts of your credit score. One is payment history, which accounts for 35% of your score and which reflects, among other things, whether you made your payments on time and whether you welshed on any balance you may have owed when you chopped up your card. Another is length of credit history, accounting for 15% of your score, which reflects whether you’re a newcomer to paying people back or not. All that stays, Watts says, if your card goes. You’ve read — perhaps from well-meaning people on FICO’s own message boards — that you should never close your oldest credit card because your length-of-credit-history measurement will immediately plummet? Again, that’s a myth, says Watts. (Dropping it might affect your credit score a decade from now, he grants, but the impact will be small potatoes compared to that of your credit-related behavior in the interim.)

Where you may get into trouble right now is in the “amounts owed” area, which accounts for another 30% of your score. One important element of that is what’s called credit-card utilization — that is, the size of the balances you carry on your credit cards as a percentage of the amount you could theoretically borrow on all your cards. Imagine, for example, that you have two credit cards with $5,000 limits on each, with a $500 balance on one and a zero balance on the other. If you close the zero-balance account, you’ve gone from using 5% of your available credit (the $10,000 total on your cards) to 10% (of the $5,000 on the remaining card) — not a big deal in credit-card terms. In low-utilization situations such as that, closing an account should have virtually no effect on your credit score, says Watts. “No harm, no foul,” he says.

But let’s say instead that you have three $5,000-limit cards — one with a $3,000 balance and the others with none — and you drop your two zero-balance cards. In this case, your credit-card utilization rate will go from 20% to 60% — a noticeable amount that will certainly ding your credit score. How much? Can’t say, since we’re back to the black-box credit-scoring system.

In any case, Watts says that if you already have a score in the upper half of the 700s or above — that’s about 40% of the population — losing a few points shouldn’t hurt you at all, practically speaking.

So if you want to chop up your credit card, start chopping. The downside is probably a lot smaller than you think.

Follow MONEY on Twitter at


More Money Wednesday Roundup: Wealthiest Religions & Google’s Guide to Credit Cards

Personal finance from around the Web:

  • You’ve probably compared incomes using every other variable in the book. What about religion? Here’s the breakdown of finance by faith. See which religions are America’s most affluent. [Good]
  • Google is testing an online credit card comparison tool. But don’t get too excited. You can only be a trial run guinea pig if you live in the UK. [Pocket-lint]

Follow MONEY on Twitter at


Mad Credit-Card Users Aren’t Taking It Anymore

It’s a big day for consumers: Sweeping reforms regulating the credit-card industry go into effect today. Among them: Your card issuer won’t be able to increase the interest rate on an existing balance or charge you fees for over-the-limit transactions without your permission. (The Fed summarizes the changes here.) All major victories for cardholders.

But if you think the world of credit cards is going to be all rainbows and unicorns now, think again.

Banking analyst Ron Shevlin summed it up nicely on American Public Media’s Marketplace show Monday morning:

I would characterize what the future’s going to look like here is the airlinification of the credit card industry. They’ve kind of nickeled and dimed consumers to death.

Airlinification, indeed.

If buying an airline ticket was ever a pleasant experience, it’s hard to remember — because now, it’s fraught with a bevy of increasing fees, poor customer service and a general feeling that airlines have nothing better to do than to come up with creative ways to break into your wallet. (Want to check a bag? It’ll cost you. Paying that fee at the airport? It’ll cost you even more. Need a blanket on your flight? You got it — after you pay 8 bucks.)

So that not-so-warm, not-so-fuzzy feeling you get when dealing with the airlines? Prepare to experience it (even more) with your credit card issuer. Let’s face it: The relationship between cardholders and their banks was never all that great. But now, I have a feeling it’s going to be downright hostile. Card issuers are finding ways to get around the new rules by setting all sorts of new traps. And I don’t think there’s any end in sight.

Last week, I wrote about how one issuer, Citibank, is imposing a new annual fee on some of its cardholders (myself included). And judging by your comments, the frustration is reaching a fever pitch. Paula from Los Angeles wrote:

Screw the customer any way you can is the credit card companies’ motto these days.

Added David from Watson, Oklahoma:

We all need to find ways to hit the banks where it really hurts. They make a small fortune on their cards already. I’m also sick of hearing them snivel about their credit losses. Give me a break!! Who bombarded every warm-bodied American with credit offers? It certainly wasn’t me, and I should not have to pay “for their increase in the cost of doing business” now. They can well afford to pay for their own misdeeds.

Paula and David are not alone. That’s just a sampling of the frustrated and angry comments we received — on just one bank’s new fee.

So can anything be done? In this month’s MONEY I wrote a piece on how you can spring yourself from these credit card traps: By dumping your big bank and going with a smaller issuer or credit union instead. That’s because these issuers are more likely to be focused on the customer relationship and less on the bottom line. Remember, there’s still one major difference between banks and airlines: When you need to fly from Point A to Point B, you often don’t have a huge number of carriers to choose from. But credit-card issuers? They’re as plentiful as stars in the sky.

Follow MONEY on Twitter at


More Money Friday Roundup: Capital One Reimburses Fees & Paying with Privacy

Personal finance from around the Web:

  • Social networking is free, right? One writer argues that we pay with privacy in order to enjoy the perks of sites like Gmail and Facebook. [Newsweek]

More Money Thursday Roundup: Avoiding an Audit & Online Shopping Shortcuts

  • The new credit card rules take effect on Monday. So the White House is hosting a live town hall at 2 p.m. EST with economic adviser Austin Goolsbee, who will answer your questions about the reforms. []
  • Online shopping is even better if you know the best tricks. Use search engines like Google, Bing and Yahoo! for some shopping shortcuts. [Shopping Journal]

Follow MONEY on Twitter at

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser