As more Gen Zer (approximately ages 12 to 27 in 2024) enter adulthood, many are quickly finding themselves in over their heads financially.
In fact, Gen Z adults have the lowest financial literacy scores across generations, according to a TIAA Institute study.
Part of the problem may be that Gen Z hasn’t had enough time to develop financial knowledge, while coming of age during a tricky economic period. But the problem can also be behavioral.
“Gen Z are bombarded by ads on social media daily and sophisticated techniques from corporations who study the psychology of buying, manipulating their minds to convince them to buy things to deal with the stress of their lives with the ‘treat yourself’ and costly self-care culture,” said Judy Esber, founder and money coach at Hear Me Finance.
“All of these lead to racked-up debt payments,” she said.
In particular, here are three ways Gen Z is racking up debt and how these young individuals can turn things around.
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Using Credit Cards
Using a credit card doesn’t inherently have to cause debt, as you could pay off your balance each month and simply earn credit card rewards rather than pay interest. But in reality, many people, especially those in Gen Z, end up with credit card debt that increases their overall costs.
“With the rise of online shopping, many Gen Z individuals are using credit cards to make purchases without fully considering their budget or ability to pay off the balance,” said Michael Collins, founder and CEO of WinCap Financial.
In fact, among different generations, Gen Z has the highest proportion of newly delinquent credit card users and the highest proportion of users with maxed-out credit cards, according to the New York Fed.
Although part of that might be explained by factors like lower credit card limits for Gen Z as they start their careers, it’s still not a great place to be in. And as problems like these mount, it can create despair that worsens the situation.
“With their lack of access to knowledge and tools, they end up feeling very little hope about their financial future which leads to blindly swiping a credit card and avoiding looking at the numbers since their lack of hope makes them feel like facing the problem is pointless,” Esber said.
However, there are ways to turn credit card debt around. That’s something Esber knows firsthand, as she maxed out her credit card with an $11,000 limit in her 20s. Refinancing through her local credit union helped lower her interest rate so she could pay the card off faster. She also suggested looking into options like balance transfers.
“Just make sure to read the fine print before you ever refinance your debt so you don’t get stuck with a bad deal,” she said.
Also, carefully tracking your spending can help you avoid falling back into credit card debt.
“It can also be helpful to limit the use of credit cards and only use them for necessary expenses that can be paid off in full each month,” Collins said.
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BNPL
Similar to the circumstances behind credit card debt, many in Gen Z also accumulate debt by using Buy Now, Pay Later (BNPL) options. Even though many BNPL offers start interest-free, they can accrue interest and penalties, particularly due to missed payments.
“BNPL services can be enticing for Gen Z, as they offer the ability to make purchases without any immediate payment but can quickly add up and lead to debt if not managed carefully,” Collins said.
Here too, it’s important to be aware of marketing messages that might be encouraging overspending.
Gen Z is “constantly being told to buy something and worry about the cost later through things like Buy Now, Pay Later programs,” Esber said.
To overcome this, it’s important to think about why you’re making a purchase you can’t pay for upfront.
“A lot of the spending I see is tied to emotional spending since our society trains people to spend to deal with the everyday stressors of life,” Esber said.
To reduce debt and break the cycle — whether that’s for BNPL or other forms of debt like with credit cards — she suggested tracking spending for two weeks and labeling each non-monthly bill with the emotion you felt when making that purchase.
“Notice which emotion comes up the most and take some time to reflect if the purchases you made actually helped to resolve the emotion or if it was only a short-term fix. Then brainstorm some ways that you can deal with the root of the emotion,” she said.
For example, if you’re making purchases due to loneliness, perhaps instead you can schedule a weekly call with a friend or join a local group to meet with based on your hobbies, like drawing or crafting, she said.
Student Loans
Lastly, Gen Z is also racking up student loan debt. Data compared to other generations in this regard is mixed, perhaps complicated by many in Gen Z still being in school and taking out loans. Regardless, it’s important to be mindful of how student loan debt can affect your finances.
While student loans can feel more necessary than online shopping, for example, being saddled with too much debt after college can make it harder to stay on budget when entering the workforce. That can then lead to racking up credit card debt, for instance.
“When it comes to student loans, Gen Z should try to minimize their borrowing and explore options for grants, scholarships and work-study programs. It’s also important for Gen Z to educate themselves about the terms and interest rates associated with their loans and make a plan to pay them off in a timely manner,” Collins said.
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Getting Out of Debt
It’s one thing to avoid debt, but what if you’re already in the red, such as because of taking out substantial student loans and carrying a credit card balance? In that case, it’s important to make a plan to pull yourself out.
“If already in debt, Gen Z individuals should prioritize paying off high-interest debts first and consider seeking help from a financial advisor or credit counselor. Building good financial habits early on can help prevent debt from becoming a major issue in the future,” Collins said.
Also, being open about your debt can make it easier to manage. Talk to your friends about money, Esber said.
“When you realize that you are not the only one in your friend group with debt you feel less alone and have a space to process and strategize how to tackle it,” she said.
“On top of that, if you and your friends are honest about your debt situation, you can together strategize ways to still spend time together without always spending money,” she said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Expert: 3 Ways Gen Z Is Racking Up Debt and How To Stop
