Younger generation faces increasing financial burden
Young Americans are beginning their financial journey burdened with higher levels of credit-card debt compared to previous generations. The financial burden can have significant and enduring consequences.
The increasing debt burden primarily stems from a significant rise in the cost of food and housing when they first entered the workforce, along with a higher proportion of Gen Z individuals who graduated with student loans. According to recent data from credit-reporting agency TransUnion, the average credit-card balance for individuals aged 22 to 24 was $2,834 in the last quarter of 2023. This is in comparison to an average inflation-adjusted balance of $2,248 during the same period in 2013.
According to experts in the field, individuals who have a greater amount of debt and belong to the younger generation tend to struggle more with making timely credit-card payments. Additionally, in the unfortunate event of job loss, these individuals often find themselves in a position where they have to depend on their family for financial assistance. According to economists, individuals frequently postpone important life milestones such as homeownership and marriage.
This generation is experiencing financial stress in a more pronounced manner compared to millennials ten years ago, according to Charlie Wise, the head of global research at TransUnion.
Lindsay Quackenbush was employed by a publishing company and earned an annual salary of $60,000. The funds were sufficient for the 26-year-old to cover her share of the rent for the basement apartment in New York City where she resides with her boyfriend. Then she lost her job.
She has a balance of approximately $1,700 spread across three credit cards and, for the first time, she is unable to fully pay off her credit cards. She is currently making the minimum payment as she searches for a new job.
When it comes to considering important life events like marriage and children, she and her friends have talked about postponing them until they achieve a stronger financial footing. “It’s uncertain when that will happen,” she remarked.
The median annual wage for recent college graduates remained relatively stable at $60,000 in 2023, similar to the figure of $58,858 in 2020, as reported by the Federal Reserve of New York.
Meanwhile, the cost of rent has skyrocketed, often consuming a significant portion of the average worker’s income. According to research from Rent, an online rental marketplace, the median rent in the U.S. has increased by nearly 22% over the past four years, reaching $1,987 as of January. According to Scott Fulford, a senior economist at the Consumer Financial Protection Bureau, around one-third of households are renters, with tenants typically falling into two main categories: young professionals and lower-income families.
According to Fulford, it is a common trend for young people to have lower average wealth compared to the rest of the population. The past few years have been quite challenging due to the significant increase in rental prices.
When Adriana Cubillo, 26, rented her one-bedroom apartment in Salt Lake City a little over a year ago, the monthly cost was $1,000. Since then, it has increased by $200. That significantly impacts the nearly $30,000 annual salary she earns as a customer-service representative for an insurance company.
She covers the cost of groceries, gas, and dog food using her three credit cards, and she currently has a balance of $1,500. She contributes approximately $50 per month towards the cards to meet the minimum payments.
When I was younger, I was eagerly anticipating the transition into adulthood and the independence that comes with it. However, the current economic conditions have presented challenges that have made it more difficult to achieve my goals of living on my own.
In 2021, there was an increase in the number of individuals who were able to obtain credit cards as credit companies relaxed their eligibility criteria. Consequently, a significant number of people took advantage of this opportunity and opened new accounts. Members of Generation Z have been opening new credit-card lines at a faster rate than other generations amidst the pandemic. According to data from VantageScore, a significant portion of consumers aged 27 or younger, approximately 5%, opened at least one new credit-card account in March 2020. As of March this year, the percentage had decreased to 3%.
According to TransUnion’s report, there has been a noticeable increase in the use of credit cards. In fact, Gen Z members who have an open loan or credit line are more inclined to have at least one credit card compared to millennials ten years ago.
According to Wise, the change could also be attributed to the influence of Gen Z individuals who were raised as authorized users on their parents’ credit cards. This upbringing may have been intended to facilitate their ability to borrow money independently once they reach 18 years old.
Members of Gen Z also experienced an increase in their credit scores amidst the pandemic. With the injection of funds from stimulus checks and limited spending options, consumers found it more manageable to reduce their debt and stay ahead of their financial obligations.
As interest rates have risen in the past two years, credit scores have been negatively impacted. Millennials with credit scores between 660 and 719 experienced a significant drop of 26 points. Gen Z was not far behind in their progress. According to Credit Karma, there was a decrease of 24 points in the average credit-score change for Gen Z individuals with credit scores above 720.
Emma Goodness, 21, has been listed as an authorized user on her mother’s American Express card since she was 16. Upon graduating from high school, Goodness achieved a commendable credit score of 745, which made her eligible for a credit card with a limit of $2,500.
She strategically allocates the majority of her earnings from her on-campus job at Tulane University in New Orleans, as well as the financial support she receives from her parents, into a high-yield savings account. She has her credit card set up to deduct automatically from her checking account.
In the previous month, she neglected to transfer funds from her savings account, resulting in a missed credit card payment. According to her, the amount she owed was less than $200. This was the second instance within a year that she had missed a payment. She mentioned that it’s a small impact on your credit score, but she is now more aware of it.
