Gen Z Stokes Credit Card Growth in Spite of BNPL

There's more to life than buy now, pay later plans, this generation is discovering. As the children of Gen X grow older their needs for setting up households and moving into adult life require use of credit cards. If fact, they are building balances faster than any other generation currently is, says TransUnion data.

In spite of their reputation for avoiding credit cards, members of Generation Z are playing a leading role in both the comeback of new card accounts and the growth of card balances, according to research by TransUnion.

The findings are especially indicative because the credit bureau has its pulse directly on card issuers on a national basis.

Plastic Recovers from Covid:

TransUnion reports that opening of new credit card accounts has nearly doubled year over year.

Issuers pulled back in mid-2020 due to the pandemic. At the end of the second quarter of 2020, card originations — what TransUnion calls new credit card accounts — came to 8.6 million. In the second quarter of 2021, levels bounced back to a record 19.3 million new accounts.

TransUnion research found that Gen Z consumers have demonstrated the highest rate of growth among all demographic groups, in term of new card accounts opened. This generation’s share of the 19.3 million in new accounts came to 14.2%, a steadily growing portion of originations since 2018.

Gen Z Leading Growth in Share of Credit Card Originations

Generation Q2 2021 Q2 2020 Q2 2019 Q2 2018
Gen Z
(1995 and after)
14.20% 13.30% 9.50% 7.50%
Millennials
(1980-1994)
32.70% 32.60% 29.70% 30.00%
Gen X
(1965-1979)
28.80% 28.00% 28.70% 28.80%
Baby Boomer
(1946-1964)
21.30% 22.50% 26.90% 27.80%
Silent
(Prior to 1945)
3.00% 3.60% 5.20% 6.00%
Total Originations
(millions)
19.3 million 8.6 million 16.4 million 15.8 million

Source: TransUnion

Gen Z, which the company identifies as those born in 1995 and later, is not only opening accounts, but it is using the cards and building balances, according to TransUnion’s findings. The study found the following growth (or shrinkage) rates, year over year, from the third quarter of 2020 to the third quarter of 2021, by generation:

  • Gen Z 13.9%
  • Millennials 1.8%
  • Gen X -4.2%
  • Baby Boomers -6%
  • Silent Generation -4.2%

In terms of outstanding average balances, Gen X leads at $6,430, while Gen Z comes in at $1,753. But the rate of growth among the youngest credit card holders is highest, suggesting that Gen Z will be catching up.

Gen Z Likes Credit Cards Now?

What accounts for this growing reliance on credit cards when Gen Z has earned a reputation for being averse to credit cards and even, in some ways, frugal? And when they have been identified as heavy users of buy now, pay later services along with Millennials?

TransUnion’s Paul Siegfried, Senior Vice President and Credit Card Business Leader, says that there are two key points to consider.

The first is that Gen Z is simply growing older and that the oldest members of the generation, now 26, are reaching the acquisitive point of their lives. In short, they need stuff, and they need a way to pay for that stuff.

“They’re out of college, they have jobs and they have access to credit cards,” says Siegfried. Even the oppressive burden of major student loan debt doesn’t erase the need for material things.

An assumption that’s been made about buy now, pay later financing is that Gen Z has adopted that and substituted it for credit card spending. The theory has been that it arises from a fear of debt.

However, in earlier research, TransUnion attacked that presumption. BNPL programs, according to TransUnion, “did not appear to have a major impact on a consumer’s usage of other forms of credit. In fact, the BNPL applicants generally used other forms of credit more than the rest of the population.” (Dig Deeper: Credit-Hungry Americans Like BNPL, Cards (and Whatever’s Next)

Generational Reality Check:

Bankers and credit union executives need to remember that generations aren’t set in concrete. Impressions may be formed in the early days of a generational grouping, but the people evolve with time and circumstances. Millennials are no longer teens with wearing backwards ball caps and riding skateboards.

Siegfried also suggests that lenders must strike more of a distinction between Millennials and Gen Z.

“Millennials have been thrown a couple of significant loops in their lives, such as the Great Recession,” he explains. That delayed their access to a normal mix of credit such that their usage is behind the “normal” trend. “If a Gen Xer was buying a house when they were 28, Millennials began buying them when they were 31, 32,” says Siegfried.

Siegfried points out that Gen Zers are typically the children of Gen Xers, not Millennials. Gen Xers have been comfortable with credit, and were the last generation being courted by card companies while they were in college. This came before passage of the CARD Act, which severely restricted marketing to consumers of that age range.

“So I guess it doesn’t shock me when I see data that Gen Z is very active with credit. Why would they be credit averse?” says Siegfried. “Yet they are also debit card active. I think that overall they are just more savvy with the financial tools that they use.”

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What Impact Could Inflation Have on Credit Card Trends?

Looking ahead, Siegfried believes that a slow rise will be seen in card delinquencies. In spite of balance growth they are currently at historic lows, but the tailing off of Covid hardship programs and the end of stimulus programs will drive growth in delinquencies. A contributing factor will be that non-prime consumers have been a significant part of the growth of cards.

The influence of current inflation is still forming. Siegfried notes that historically it takes an increase in the discount rate of about 200 basis points before the related increase in consumer rates begins to have an impact. A jump like that would increase card rates sufficiently to shift minimum payments due on cards to the point where someone who generally can just afford the minimum would then be over their head, all things being equal.

The executive points out that inflationary price rises for essentials would also be a factor. When filling the gas tank is going up, that has ripple effects throughout a consumer’s budget, and could affect how they will pay.

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