How Millennials and Gen Z use and perceive credit
The economic impact of COVID-19 has hit almost everyone hard, and how the other end of the pandemic looks no one quite knows just yet. For the youngest of generations, Gen Z (iGen) and Millennials (Gen Y), their financial perspectives will be largely shaped by the events of this past year. Businesses closed, massive layoffs, pay cuts, and job losses will undoubtedly have both a substantial impression and direct impact on both generations.
Now that both of these two generations have – or will – grow up in a turbulent economic atmosphere, how Millennials and Gen Z use and perceive credit going forward will dictate their financial futures. Here we take a look at each generation’s habits, perceptions, and history when it comes to credit.
Millennials and credit
Millennials were born between 1981 and 1995. This group was coming of age in the Great Recession and, having witnessed economic uncertainty, millennials have generally shown themselves to be monetarily responsible when compared to their older counterparts. Now facing a second recession in their adulthood, this will undoubtedly have a significant impact on their financial perceptions. Forty percent of millennials (slightly lower than Gen Z) have either lost their own job (or someone in their household has) or experienced a pay cut due to cutbacks related to the coronavirus pandemic.
While it’s true in previous years millennials saddled themselves with excessive student debt and delayed making big life decisions, such as starting a family or purchasing a home, their habits have changed. Today they have been steadily working to improve their financial situations and credit standings. Recent reports show millennials have been:
- Increasing debt but keeping up with debt payments.
- Reducing credit card balances.
- Increasing credit scores (11 point increase on average).
- Buying homes vs. renting and taking on mortgage debt.
However, evidence shows millennials still don’t quite understand consumer credit. Though they tend to exercise caution before making purchases or significant financial decisions, they often fail to comprehend how professionals perceive their credit. Fifty percent of affluent millennials carry credit card debt. This generation’s average credit score, 658, is considered “fair” and moving in the right direction, still has room for improvement.
Gen Z and credit
Gen Z is individuals born after 1995 and is the first truly digital natives. This means their finances have always been directly tied to online shopping, banking, and other digital forms of consumerism. This generation’s views were largely shaped by watching their parents struggle through the Great Recession. Now that they have also experienced what a pandemic can do, they’ve entered the second economic decline in their relatively short lifetimes. Just one year ago, Gen Z was set to enter a strong economy with record low unemployment rates. However, they had little to no time to build their credit or start their savings/investments and now must face these challenges.
Interestingly enough, this generation seems to have a pretty good handle on credit, perhaps since they didn’t grow up with “old school” banking and common usage of cash. Recent data shows young consumers today are “better educated about their credit,” per a recent CNBC report.
- 50% of “credit-active” Gen Z consumers use credit cards.
- 41% of today’s Gen Z’ers use credit cards (compared to 34% of millennials in 2012 when they were the same age).
- 37% of Gen Z consumers carry student loans today compared to 44% of millennials in 2012.
- Gen Z is more likely to carry an auto loan compared to 2012 millennials.
- More than half of Gen Z consumers have “prime” and above credit scores (contrasted with 37% of millennials at the same age).
One reason why Gen Z may be more credit savvy is due to the numerous digital tools and resources they’ve grown up with. They also receive more parental or other support than previous generations did. Furthermore, traditional credit reports are easier to obtain and credit scores can routinely be checked through other financial services, such as credit cards and banks, which often help consumers be motivated as they watch their progress of paying down debt. All of these resources can be contributors to Gen Z’s stronger credit standing.
Where both millennials and Gen Z should go moving forward
Not unlike previous generations, Gen Z and Millennials should not be lumped into the same group, they are vastly different in their views about money and credit. That being said, they can be grouped together when it comes to finding ways they can improve upon or build their credit. To improve credit scores, consumers should:
- Routinely check credit reports and identify and fix errors, these mistakes can lead to larger credit problems.
- Pay off credit card balances each month to avoid snowballing interest charges (contrary to common belief, owing money does not help build a better credit score).
- Pay credit card and other bills on time, late payments bring scores down.
- Set a budget and stick to it to avoid creating excessive debt.
- Refinance student loans to ones with better interest rates.
Additionally, those struggling with their credit scores should investigate a solution in alternative credit scores. This formerly nonconventional method of building a credit score is an excellent way to gain access to lines of credit and other loans.
All consumers can use these, along with other proactive steps to educate themselves in consumer credit, something short-term lenders and alternative credit companies can help with. The more knowledgeable consumers are, the more financially sound they’ll be as we move forward after the pandemic is over. Overall, when consumers are in stronger financial standing, it generally results in a more stable economy.
Connect, formerly known as PRBC, has been serving consumers who are credit invisible or need help achieving a stronger credit score since 2005. Our alternative scoring solution enables individuals to be approved by lenders and creditors. It’s easy – all you have to do is sign up for our service, use our free tools, pay your routine bills on time, and track your score – we do all the rest.
To learn more about how Connect can help you, contact us today.