In recent years, Generation Z (born 1995-2012) has dramatically changed its financial behaviors, especially regarding credit card use. Initially, Gen Z preferred debit cards over credit, aiming to avoid debt like their Millennial predecessors during the mortgage crisis. However, recent research indicates a surge in Gen Z's digital account opening and credit card usage, surpassing Millennials at the same age. This blog explores the factors driving this trend, the financial stress and debt burden it brings, and the potential future implications.
Increasing Reliance on Credit Cards
Historically, surveys showed Gen Z's preference for debit cards to avoid debt. However, by the end of 2023, research from TransUnion revealed that 84% of Gen Z individuals aged 22-24 held general-purpose bank card accounts, compared to 61% of Millennials at the same age in 2013. This 23-percentage-point increase highlights a growing reliance on credit among young adults. TransUnion's data also indicates a decline in private label credit card use among Gen Z, with only 26% holding these cards compared to 44% of Millennials. This trend suggests that Gen Z prefers general-purpose bank cards' versatility and broader acceptance over store-specific options.
Rising Debt Levels
According to Financial Brand, as Gen Z's credit card usage rises, so does their debt. The average credit card balance for Gen Z individuals aged 22-24 at the end of 2023 was AED 10,414 (USD 2,834), a 26% increase from the inflation-adjusted AED 8,267 (USD 2,248) average balance Millennials held at the same age. This increase is not limited to credit cards; auto loan balances have also grown, with Gen Z owing an average of AED 79,897 (USD 21,767) compared to the inflation-adjusted AED 69,967 (USD 19,043) for Millennials. Gen Z's mortgage balances reflect significant inflationary pressures and a constrained housing supply. The average mortgage balance for Gen Z was AED 790,000 (USD 215,150), a 44.3% increase over the AED 547,600 (USD 149,130) average for Millennials when adjusted for inflation. (Source:https://thefinancialbrand.com/news/gen-z-banking/gen-z-uses-credit-cards-more-than-millennials-at-the-same-age-177867/?edigestM1)
Debt-to-Income Ratios and Financial Stress
TransUnion's analysis reveals that Gen Z faces a higher debt-to-income ratio than Millennials at the same age. Gen Z's ratio is 16.05%, compared to 11.76% for Millennials. This difference highlights the greater financial strain on Gen Z, compounded by lower income levels. When adjusted for inflation, Millennials' 2013 income was almost 15% higher than the average income for Gen Z today. This financial stress is further evidenced by higher delinquency rates among Gen Z. Within 24 months of opening new credit accounts, Gen Z exhibited higher delinquency rates for auto loans, cash back credit cards, and personal loans than Millennials. Nearly 10% more Gen Z borrowers were 60 or more days past due, reflecting the financial challenges they face early in their credit journeys.
Economic Influences and Inflation
Gen Z's financial landscape has been shaped by two major economic events: the Great Recession and the pandemic-induced recession, followed by significant government spending. These events have contributed to persistent inflation, increasing credit card use across generations. TransUnion and Federal Reserve studies show outstanding credit card balances have surpassed AED 3.67 trillion (USD 1 trillion). Gen Z's higher debt levels and lower incomes have led to greater financial insecurity. Many Gen Z individuals report feeling less financially stable and more stressed about their finances than Millennials at the same age. This generational shift in economic confidence is a concerning trend that warrants attention from financial institutions and policymakers.
Educating Gen Z on Credit Use
Despite their growing reliance on credit, many Gen Z individuals lack a fundamental understanding of how credit works. Michele Raneri, Vice President and Head of U.S. Research and Consulting at TransUnion, found that Gen Z consumers often learned about credit from informal sources like movies and social media rather than formal education. This lack of knowledge contributes to their focus on immediate credit needs rather than long-term costs, such as interest rates. Raneri's interviews with Gen Z consumers revealed widespread misconceptions about credit terms and products. For example, many Gen Z individuals did not understand the concept of "authorized users" on credit accounts and found terms like "credit builder" confusing. This highlights a significant opportunity for financial institutions to provide targeted education and clear communication to help young consumers navigate credit responsibly.
Strategies for Financial Institutions
To better serve Gen Z and help them manage their finances effectively, financial institutions can implement several strategies:
Engage with Gen Z Directly
Financial institutions should seek direct feedback from Gen Z consumers to understand their unique perspectives and needs. Traditional methods of communicating credit concepts may not resonate with this generation, so using clear and relatable language and terms is crucial.
Simplify Financial Education
Financial education can effectively educate consumers about credit application and usage. Features like pop-up definitions and explanations within banking apps or websites can offer immediate, context-specific insights. This approach helps young consumers understand the implications of their financial decisions as they make them.
Develop Tailored Products
Creating credit products that address Gen Z's needs and behaviors can foster better financial management. For instance, offering secured credit cards with straightforward terms can help young adults build credit without falling into debt traps.
Leverage Digital Platforms
Given Gen Z's familiarity with digital platforms, financial institutions should utilize social media and online resources to deliver financial education. Short, engaging videos on platforms like TikTok can provide valuable information in a format that resonates with Gen Z.
Focus on Financial Wellness
Beyond credit products, financial institutions can offer tools and resources to help Gen Z manage their overall financial wellness. Budgeting apps, savings programs, and personalized financial advice can empower young consumers to make informed decisions and build a stable financial future.
The Future of Gen Z's Financial Landscape
As Gen Z continues to navigate the complexities of credit cards in UAE and debt, their financial behaviors will have long-term implications for the economy and the financial industry. Understanding this generation's unique challenges and opportunities is essential for developing effective strategies to support their financial well-being. Financial institutions play a critical role in shaping Gen Z's financial future. By providing tailored education, clear communication, and innovative products, they can help Gen Z build a strong financial foundation and avoid the pitfalls of excessive debt. In conclusion, Gen Z's surge in credit card usage reflects a broader trend of increasing reliance on credit amid economic pressures and inflation. As this generation matures, their financial behaviors and attitudes will continue to evolve. Financial institutions can foster a more financially secure and informed generation by proactively addressing their needs and providing the right support.