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Thinking Forward — Two Big Back-to-School Credit Trends for Young Consumers

In this edition of Thinking Forward, we look at trends in consumer credit with an eye towards young people and reflect on the hows and whys of comparing generations.

Generations are artificial constructs.

The cutoff between one generation and the next is an arbitrary one, even if it’s not random. That’s evidenced, just for example, by the many different frameworks for defining generations out there. What’s the difference between being born in 1997 and 1996 (the cutoff that the Pew Research Center has used since 2019 to separate “Millennials” from “Gen Z”)? Can you really assume that someone born in 1996 will necessarily have different consumption preferences and spending patterns—much less a different psychology, culture, or “mindset”—than someone born in 1997? The truth is, there is as much diversity within any particular age range as between different ages; it depends on what kinds of differences (or similarities—but that’s rarely the point of generational comparisons) you’re looking for. Pew Research agrees, and as of May 2023, Pew is changing the way it conducts and reports on generational research.

Generations are artificial constructs. At the same time, generations can be useful constructs.

At the same time, generations can be useful constructs. They can be useful in Thanksgiving table debates, standup comedy, and strongly worded memes. But they can also be useful in market research and strategy—as a way to segment consumers, narrow your focus, and better understand all the stuff that shapes people’s decision-making and behavior: needs and wants, motivations and expectations, aspirations and anxieties.

Still, it can be tricky to apply group trends to individuals. Insofar as there are commonalities to be found among those sharing an age group, those commonalities are not due to age per se but are instead the results of shared experiences and encounters, both big historical events and shared stages of the human lifecycle. Think in terms of tendencies and patterns—“cohort effects.” And because different people experience the same events differently, those cohort effects are shaped by things like race, class, and gender, too. When it comes to market research, demography is a proxy for experience.

When it comes to market research, demography is a proxy for experience.

Some of the first reports from Filene’s Center of Excellence for Consumer Decision Making dug into generational differences in how people talk—and think—about money. One of the most important findings? Millennials were much more likely to think negatively about debt and feel anxiety about their financial futures. This makes sense: For many, the global financial crisis was a dramatic and formative experience, the subsequent slow recovery dampened economic expectations, and the growing costs of higher education, housing, healthcare, and childcare at a time when many were entering adulthood and going through those rites of passage contributed not only to an outsized debt burden but also to a sense of struggle with forces outside one’s control.

A lot has changed, of course, since Filene’s first report on “Millennial money chatter” was published 7 years ago. So what’s going on today with Millennials and their younger companions in Generation Z?

Student debt is still a big deal.

For borrowers both young and old, student loan repayments are restarting in October after a lengthy three-year pause due to the COVID-19 pandemic. Student loan debt is the second-largest category of consumer debt after mortgages, and the pandemic pause resulted in significant relief for millions of people, including many of the most vulnerable. Experian estimates that when payments resume, the average monthly student loan payment will be around $200, and TransUnion recently suggested that 1 in 5 borrowers will end up paying $500 or more per month. That means less money for other expenses, including repayments on other loans. During the pandemic, many student loan borrowers actually took on new debt, and according to the CFPB, 1 in 5 borrowers overall have risk factors that indicate they may struggle with student loan repayment. The shock may result in delinquencies in other products; TransUnion models suggest unsecured cards and personal loans may be more at risk. The impact could also reverberate through the economy: We know that student debt has contributed to declines in homeownership and results in less saving for retirement.

At the same time, the federal government’s new income-driven repayment program, which opened in August, promises to reduce or eliminate payments for over 20 million borrowers. But a universal, non-means-tested moratorium is different than a program you have to qualify and sign up for. So in the near term, credit unions should expect many members to be working with tighter budgets—and maybe making tough tradeoffs—starting in October. Now is the time to check your ACH transactions, identify those members who had scheduled payments to the main federal loan servicers in 2019, and connect with those members with a plan to support them.

Credit card debt is at its highest point ever, and young people are joining the party.

Credit card debt rose to over $1 trillion in Q2 2023, up 4.6% from Q1, according to the New York Fed—the highest level on record. 69% of all U.S. Americans have a credit card (up 10% over the last ten years), and there are 70 million more credit card accounts open now than there were pre-pandemic. There is evidence that the student loan repayment pause led to increases in credit card borrowing; others may be turning to credit cards to deal with inflation or the spending down of pandemic-era savings.

Importantly, young people are helping drive growth in credit cards, too. According to TransUnion, as Gen Z consumers “age into financial independence,” they are turning to credit cards to support spending. Gen Z total credit card balances are up more than 50% and Gen Z’s share of credit card balances are up almost 30% from a year ago. Unsecured personal loan balances are also growing, reaching record levels in the second quarter. What’s more, TransUnion surveying finds that 50% of Gen Z consumers (vs. 32% for the full population) say they plan to apply for new credit or refinance existing credit in the next year. Yet only 35% of Gen Z consumers—fewer than any other generation—report that they have the access to credit that they need.

Only 35% of Gen Z consumers—fewer than any other generation—report that they have the access to credit that they need.

There is a massive opportunity here for credit unions to connect with young members as they form financial habits that will persist throughout their lives.

Millennials became famous in the 2010s for an apparent aversion to debt. It seems clear now that Millennials’ relationship to money was partly the result of a widely, but not universally, shared set of experiences in the wake of 2008—and partly a matter of life stage.

Young people today have had very different experiences that are creating different approaches to personal finance. Just look at the emerging class of fintech apps catering to Gen Z …

  • Frich (that stands for “f*cking rich”) — a social media-inspired financial education app for 20-somethings
  • Yotta — a mobile bank account (with debit card) that gamifies savings by paying out cash rewards via lottery rather than interest
  • Alinea — a hands-off mobile investing platform built with young, beginner investors in mind
  • Debbie — a mobile app focused on helping users pay off their debt, build better credit and better money habits, and save with credit union partners

As young people enter into early adulthood, they may be looking for new kinds of providers more aligned with their perspectives on money and debt.

On the other hand, we're proudly Gen X and Millennial. We were only able to buy homes when we stopped with the avocado toast. What do we know?

Want to connect and learn more about hot topics and trends like this that have an impact on credit unions? Be sure to subscribe to Filene's new LinkedIn Thought Leadership Newsletter — Thinking Forward! Also, look out for a forthcoming post on the everyday finances of today's college students, from recent Filene intern Rohit Subramaniam.

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