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As Gen Z-ers enter their twenties there has been a dramatic increase in their credit card use. At 31.4 million strong, credit-eligible Gen Z-ers make up 40% of all consumers in the United States. This influx of new spenders has reinvigorated the credit card industry after the lull it experienced when millennials were coming of age during the 2008 recession. 

Why is this new generation so eager to use credit cards and will they learn from struggles of their parents and millennial counterparts?

Who is Generation Z?

The Gen Z cohort includes anyone born after 1995 (mid-nineties) or before 2015 (mid twenty-tens). The oldest Gen Z-ers are 25 years old and according to recent data, they make up around 36 percent of the workforce. They are also the highest educated generation in history, with 59% of 18 to 20-year-old Gen Z-ers attending college, compared with 53% of similarly-aged millennials in 2002.

However, despite being on track to be more broadly educated than millennials, Gen Z-ers have less student debt with an average student loan debt of $12,000 to the millennial’s $32,000. They also haven’t ruined their credit, at least not yet, and it’s not because they don’t have any. 

66% of Gen Z-ers are credit active, which means they are in the system with some sort of credit product. Amazingly, 50% have a credit card and a prime credit score. Clearly, they aren’t afraid of credit cards, and they seem to be handling the debt they have deftly. 

This may have something to do with the fact that many Gen Z parents belong to Gen X; who lived the Gen X credit card missteps firsthand and taught their kids how to avoid them.

The Gen Z Approach to Money

Credit cards are the most popular credit product for Gen Z-ers. Paying with plastic is the norm, as is contactless payment. This fully digital generation grew up with debit cards and are used to visualizing their money in a digital format. You won’t find Gen Z balancing a paper checkbook or paying with cash (unless they have to) because the digital alternatives are easy and just make sense. 

By comparison, only 1 in 3 millennials regularly carries a credit card, preferring to pay with cash whenever possible. When they do carry plastic, it’s typically a prepaid or debit card. To the Gen Z-er, this kind of thinking is outdated and just doesn’t fit a modern lifestyle. Why carry cash when you can use a debit card? After all, if you lose your debit card, you can pay for your groceries with one app and cancel your debit card with another, all in a matter of seconds. 

The Gen Z comfort level with fully digital banking makes the leap to credit cards  completely unremarkable. For Gen Z credit cards are less about wish fulfillment and more about practical financing. They learned early on that getting a credit card is an important step to building your credit. They also were taught that it is a practical way to pay for expenses upfront and pay them back in smaller increments. 

For a Gen Z college student this can mean, financing a semester of books that you pay back incrementally with money you make from a campus job. It could also mean, covering daily expenses during the school year and paying down the balance with a summer job. For those with a steady job, a credit card is simply a tool to be used in place of a debit card for everyday purchases and paid off monthly with your bank account.

Millennials Let Credit Card Growth Lag; Gen Z is Picking Up Where Gen Z Left Off

A TransUnion study confirmed that millennials have fewer credit cards and lower balances than Gen X-ers did when they were 24 to 34. No doubt, because the latter was bombarded with a wide variety of credit offers in their college years; a practice now banned by the Credit CARD Act. Gen X-ers mismanagement of this and other subprime debts shaped the way millennials viewed debt. 

Accordingly, since the recession of 2008 and 2009 millenials have been less eager to give in to the temptation of credit cards, opting instead to focus on paying down student loans and taking  out secured home and auto loans. Gen Z seems to have observed the consequences of the recession, but taken away a different lesson. Debt isn’t bad but bad debt habits are. 

Credit cards are simply a tool to be used, and armed with lessons from their parents and millennial cousins, they can borrow smarter  and reap the rewards of a healthy credit economy. 

Credit Cards Provide Built-In Reward and Fraud Protection

Credit cards provide fraud protection that debit cards do not, and have valuable rewards like cash back and miles that shouldn’t be left on the table.

Gen Z-ers are on track to take on much more credit card debt than millennials did, a habit they may have picked up from their Gen X parents. 

However, unlike their parents or millennials, 50% of Gen Z has a credit card and a prime credit score. Gen Z has, so far, kept their average credit score high and has not done irreparable damage to their credit. This success may be in large part due to the wide availability of credit score education and tracking. 

Digital Tools Are Improving Credit Awareness Worthiness Among Gen Z-ers

A defining characteristic of the Gen Z cohort is their status as the first generation in history to grow up with digital technology including smartphones. Free credit scores and credit score simulators allow students to preview the impact of new credit so they can make informed financial decisions. 

Lenders Are Willing to Lend to Gen Z

Gen Z’s higher credit scores may make lenders more comfortable extending credit. Although, underwriting standards in the auto and credit card industries have also become more favorable toward subprime borrowers since 2012, making credit cards approval a surer bet for Gen Z. 23% of subprime Gen Z-ers have a credit card, nearly double the 12% of millennials that had one or more at the same age.

The higher concentration of Gen Z-ers with credit cards has led to an increase in debt balances. So, the average debt balance of an 18 to 24 year old Gen Z-er has exceeded millennial data from the same age range. 

Popular Credit Product Compared: Gen Z vs. Millennials

In 3 major categories, Gen Z  is borrowing more vigorously than millennials. Their interest in auto loans and mortgages, despite their younger years,  suggests that the generation is prioritizing traditional financial milestones.

Generation ZMillennials
Credit Card41%34%
Student Loan37%44%
Auto Loan23%16%
Store Credit Card20%24%
Personal Loan (unsecured)4%3%
Source: TransUnion, percentage of credit-active consumers

Time Will Tell if Gen Z Can Continue to Reap the Benefits of Credit Cards Without the Pitfalls

The credit card boom among Gen Z is consistent with the economic growth that we’ve seen worldwide since 2009. Booming economies encourage credit card spending but that growth came to a temporary halt in 2020 due to the COVID-19 pandemic.The crisis will no doubt have an impact on whether or not Gen Z can continue to embrace credit card debt. Massive unemployment, triggered by the pandemic, is an economic event on par with the recession of 2008, though the long term impact for Gen Z is too soon to call. 

Nevertheless, Gen Z has shown a high level of financial savviness for their young years. In addition to viewing financial products with greater sophistication, they have a predisposition to save money both through more responsible spending and intentional saving and investing. In times of crisis, savings and price-conscious buying can be critical to maintaining control of your finances while the economy recovers. Aided by apps and technology that help automate these habits, Gen Z is determined to retain control of their money to avoid the struggles they witnessed as children.

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