Gen Z Has Credit Issues. Here's How to Fix Them
Generation Z has a credit problem.
"Duh," you say. That's fair. Younger generations virtually always struggle with credit compared to older ones, for many reasons.
They simply start out with low credit scores, for one. Maturity can be an issue. But also hampering young people is a woeful lack of education about handling finances broadly, but specific to this, how to properly use and build credit.
So this week, our focus within National Financial Literacy Month will be Gen Z's struggles with credit—and we'll have an expert weigh in on the best ways anyone can manage and improve their credit scores, Gen Z or not.
The Tea
We just got done acknowledging that younger generations are naturally more prone to struggle with credit. Even then, Generation Z—usually classified as those born between 1997 and 2012—should be concerned with the general direction of their credit and finances, which is, in a word, south.
YATI Tip: Think you're too young to build credit? Well … you might be wrong.
We've explored a recent report by credit and financial management platform Credit Karma that provided various financial and credit metrics across five generations of Americans. The report reflects data from 78.2 million Credit Karma members collected during the fourth quarter (October through December) of 2022, which was then measured against their previous report's data, collected during the second quarter (between March and May) of 2022.
Among the findings?
- Generation Z had accumulated an average of $16,283 in overall debt during the fourth quarter. That's the lowest total debt among the five generations, to be fair, but it represented 3.1% more debt than in Q2—the fastest pace of debt growth.
- Gen Z's credit card debt was a similar story. Its average of $2,781 was the lowest overall credit card debt, but that was 5.9% higher than in Q2—far more rapid debt growth than the other generations.
- Generation Z also had the largest percent change in average auto loan debt (2.3%).
- Gen Z was the only generation to have its average number of past-due accounts grow during the period (by 1.8%).
- Generation Z expectedly had the lowest average VantageScore 3.0 score (653), a point lower than in Q2 2022. But even Credit Karma says "Generation and credit scores had a positive correlation, which means that being older is associated with higher credit scores."
Again, lack of experience and education are clear culprits. Here are two important findings from a recent survey produced by the Capital One Insights Center:
- "Younger generations are more likely to believe that carrying a credit card balance each month is a good way to increase your credit score, and what's worse, this misconception grows stronger with each generation."
- "Gen Z indicated that they don't know how to improve their credit score and feel that they don't have access to credit."
But today, we'll put these issues to bed.
The Take
To help Gen Z get a better handle on their credit, we took a few minutes to talk to Ralph Haro, Managing Vice President of New to Credit at Capital One. Our discussion centered around what steps students, younger people and other Americans with low credit can take to become more financially literate and improve upon their credit.
Why It's Important to Build Good Credit
Your credit score is one of the most important numbers in your life. It's based on a scale from 300-850, divided into five different ranges:
- 300-579: Poor
- 580-669: Fair
- 670-739: Good
- 740-799: Very good
- 800-850: Excellent
This number can affect every major purchase you'll ever make—sometimes by making it more expensive (lower credit scores could mean higher interest) and sometimes by preventing you from being able to make those purchases at all!
But you don't just get good credit—you have to build good credit.
When teens become adults, they typically begin with a credit score of under 600 (fair to poor, depending on the score). According to card provider Step, even raising your score to 725, in the upper range of good scores, can translate into all sorts of savings—lower car insurance payments, better interest rates on your student loans, even one month's rent for a security deposit instead of two!
YATI Tip: Debit cards and credit cards each have their own risks. Know what you're getting into.
"Having good credit is a pivotal building block for the rest of your life," says Capital One's Haro. "Building credit with responsible use early while in college could mean that when it comes time to find an apartment, get a job, take out a car loan, or apply for a mortgage, you already have a long history of credit to help you."
Will Carrying a Balance Increase Your Credit Score?
"53% of Gen-Z respondents from the Capital One Insights Center Credit Beliefs Survey believe that carrying a credit card balance each month is a good way to increase their credit score, which is not the case," Haro says. "While you don't always have to pay your balance in full each month—which is one of the benefits of having access to credit—that in and of itself does not increase your credit score."
Does Gen Z Really Have No Access to Credit?
That's patently untrue. While yes, Gen Z might have a harder time securing a credit card or other lines of credit compared to older generations, it's far from impossible.
"There are a variety of credit cards that help consumers establish and improve their credit score, understand and manage payments, and unleash the many benefits that accompany a strong credit score," Haro says.
To wit, Capital One offers student cards, such as the SavorOne Student, which offers unlimited 3% cash back on dining, entertainment, streaming services, credit monitoring, and more. There are also starter credit cards like the Petal® 1 "No Annual Fee" Visa® card, which helps people with low or even no credit score build their credit.
There's even a credit card for teens. The aforementioned Step Visa Card is a secured credit card that a teen can open with a parent's help. Teens can opt in to a service where, once they turn 18, Step reports the past two years of transactions, payment history, and more to credit bureaus, which can provide a massive early boost to their credit score.
How Else Can Gen Zers Improve Their Credit?
Haro suggests that, before applying for any credit card, to check whether you're pre-approved first. Many credit card companies have pre-approval tools to determine your eligibility for a card, and they won't impact your credit score if you don't apply.
YATI Tip: Looking for your first credit card? Here are some of the best choices.
Also, make sure you're paying your credit card (and other bills) on time.
"Keeping your account in good standing is essential to your credit health," Haro says.
We'll point out that you can even build credit without a credit card, through means such as repaying existing loans or being an authorized user on a parent's card.
How Can You Monitor Your Credit?
"Periodically reviewing your credit report and credit score could help you stay on top of your financial health and help you catch any errors early," Haro says.
Everyone can get a free copy of their credit report from each of the three major credit reporting agencies (Equifax, Experian, and TransUnion) once each year at AnnualCreditReport.com. But many credit card issuers and banks—including Capital One, American Express, Bank of America, and Chase—also provide varying credit-monitoring tools.
Thanks once again for spending a few minutes with us this weekend. Good luck building your credit … and good luck keeping your nerves in check if you've got a team in the NBA or NHL playoffs.
Riley & Kyle
Young & The Invested (Soon to be WealthUp)
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