Got A Credit Card? We've Got Some Uncomfortable News For You

As the cost of living crisis continues to cripple our finances, falling into debt becomes more of a likelihood. However, it seems that one group particularly has accumulated significant credit card debt – Gen Z are racking up more credit card debt than other generation. 

Americans born between the years 1997 to 2012 have pilled up $2,781 worth of average credit card debt, according to a new report from Credit Karma.

Despite the fact that Gen Z’s credit card debt scored the lowest across all five generations, it managed to increase by around 6% compared to the three months through May 2022.

Meanwhile, the average debt balloon of a member of Gen Z grew to $16,283 in the last quarter of the year.

The data from the report was collected on January 6 from 78.2 million Credit Karma users and looked at information from various generations. With members of Gen Z having to balance credit cards mortgages and student loans, it’s not a shock they’re racking up debt. 

But, what else could be the cause of their money problems? Pete Ridley, the finance expert at Car Finance Saver thinks there are other reasons why this generation is facing debt issues. 

Why is Gen Z racking up credit card debt?

1. Limited financial literacy: Gen Z might not have received sufficient financial education or guidance, leading to poor financial decisions and excessive credit card usage.
   
2. Consumer culture: Social media and marketing campaigns can promote a culture of consumerism, encouraging Gen Z to spend beyond their means and rely on credit.
   
   
3. Instant gratification: The desire for immediate satisfaction might drive Gen Z to use credit cards for purchases they cannot afford.
   
   
4. FOMO (Fear of Missing Out): Social pressure to keep up with peers and trends can lead to impulsive spending and reliance on credit cards.
   
   
5. Economic factors: Economic challenges, such as loan debt or underemployment, can push Gen Z to use credit cards to cover essential expenses.

Services like Klarna and Clearpay aren’t helping either. Ridley believes these services can lead to overspending. “The convenience and ease of BNPL services might encourage impulse purchases and overspending, leading to financial strain,” he says.

Failing to make payments on time can lead to late fees which can potentially affect your credit score. Additionally, they have limited consumer protection.

“BNPL services often have fewer regulations compared to traditional credit products, which could lead to disputes and other issues,” Ridley explains.

So how can Gen Z and other generations avoid racking up debts in a cost of living crisis?

Ridley says:

1. Build financial literacy: Educate yourself on personal finance topics, such as budgeting, saving, investing, and managing debt. Utilise books, online resources, or personal finance courses to improve your understanding of these subjects.
2. Create a budget: Develop a monthly budget that includes all your income sources and expenses. This will help you understand your spending habits and make necessary adjustments to live within your means.
3. Use credit cards responsibly: Treat credit cards as a tool, not a source of free money. Only charge what you can afford to pay off in full each month to avoid interest charges and minimise the risk of debt accumulation.
4. Save for emergencies: Establish an emergency fund to cover unexpected expenses, such as home or car repairs. This will help prevent reliance on credit cards in difficult situations.
5. Monitor your credit score: Regularly check your credit score and credit report to ensure accuracy and identify any areas for improvement. This will help you stay on top of your financial health.
6. Be cautious with BNPL services: If you decide to use services like Klarna or Clearpay, be mindful of the potential risks. Ensure you can afford the payments and make them on time to avoid late fees or negative impacts on your credit score.
7. Seek professional help if needed: If you find yourself struggling with debt or managing your finances, consider seeking help from a financial advisor or credit counsellor. They can provide guidance and help you create a plan to improve your financial situation.