It should come as no surprise that clients of Young Americans Bank, which focuses on kids and college-age adults, are afraid of credit. But the worry is that such wariness will follow them into adulthood.
Children may not fully grasp the idea of borrowing when their parents foot the bill for everything. As Richard Martinez, the Denver bank's president and chief executive, sees it, bigger problems could be brewing for the balance sheets of tomorrow: The flood of mortgage foreclosures after the 2008 financial crisis could create a generation of reluctant borrowers.
"The recession showed this younger generation the possible negative effects of credit," Martinez said in a recent interview. "They maybe saw their families go through tough times with credit.... It is troubling for our consumer society because there are just some things you can't save up to buy, like a house."
The $16 million-asset Young Americans Bank is not worried much about loan growth for the sake of profitability. Loans comprise about $42,000 of its balance sheet. The bank's mission is to turn kids into good banking customers, using what it calls an "educational model" where earnings aren't its objective.
Rather, the bank relies on a sizable capital contribution each year from the Daniels Fund, a philanthropic organization endowed by Bill Daniels, who was a billionaire cable television tycoon from the Rocky Mountain region.
Still, Martinez and his team are encouraging lending. Used-car loans once were a major business, but today many of its loans are small often ranging from $20 to $500 providing working capital lines to kid entrepreneurs. Ideally, the banks would like to see parents encourage kids to apply for loans for things like paying for half an iPad, even if the payments were made using allowance money.
Young Americans Bank also offers credit cards with a $100 limit, though the product isn't very popular.
"The smart uses of credit are where we're focusing most of our time," Martinez said. "People think we are crazy, but we do it so kids can understand it. How do you learn to understand it if you don't do it? We encourage parents to allow their kids to get it."
There is a noticeable change in children and credit, Martinez said, specifically in kids who come from lower-income communities. Even in its Young AmeriTowne program, which gives kids a crash course in economics, children from lower-income backgrounds are afraid to spend fictional money. Those kids also seem to lack the confidence in their ability to repay.
"All of that comes back to a sense of financial well-being and willingness to borrow against that future ability," Martinez said.
Kids' life experiences can shape their views of credit, said Nondini Naqui, director of Society of Grownups, an organization that promotes financial literacy among people in their 20s and 30s.
"People get their attitudes about money largely based on what they saw growing up," Naqui said. "Money is a deeply personal issue.... What we try to do is encourage people to unpack their attitudes and open up the conversation on a taboo subject."
While some millennials are terrified of credit, Naqui said others have a healthy relationship with it and use credit cards to pay for everything. Regardless of their behavior, the younger generation seems more active with its relationship with credit, she said.
"Behaviors are across the board, but what we've found is that our grownups are aware of their debt," Naqui said. "They are much more responsible with the level of debt they have, compared to their counterparts in 2008."
For instance, home buying consistently remains a top goal for young adults, but they are aiming to make a bigger downpayments, Naqui said, adding that it seems like a "self-guided" decision rather than one created by changes to the mortgage industry.
How will today's preferences and practices translate into adult habits? That remains to be seen. The Great Depression, for instance, largely created a generation that kept a watchful eye on credit and money overall.
"I wouldn't worry too much about it yet, but it is interesting to get the perspective of someone who's watching a different generation closely," said Christine Pratt, senior credit industry analyst at Aite Group.
"Who knows? He might be right," Pratt added. "Maybe kids are more responsible. That's something we saw born during the pre-baby boomer generation. Those folks did have that reluctance to spend money, to an extent."
But that didn't translate into thriftiness among their children.
The baby boomers "are big spenders," Pratt said. "People over 50 are the largest group of homeowners in the U.S. They also buy two-thirds of all new cars. They're clearly not afraid to spend, and they're not afraid to borrow."
Credit among adults has also largely rebounded, Pratt said, noting that overall borrowings are within $500 billion of 2006 levels.
Borrowing is also expected to rise once interest rates move up and those using cash look for other ways to deploy it. Meanwhile, some borrowers will look to lock in low rates in advance of increases.
Even if kids are wary of credit today, they will need to develop a comfort level with credit given its prevalence, some industry observers said. "They might be afraid to borrow, but they'll likely be forced to borrow," said Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy. "You have to borrow to get an education, you have to borrow to buy a house. Unless they are trust fund kids, it will be forced upon them, so the important thing is to teach them to do it intelligently."