Credit Cards 101: A How-To Guide for Gen Z

Gen Zers don’t have as many credit cards as their older counterparts, but this young generation is racking up debt faster than any other age group. According to a new study from Experian, the average Gen Z credit card balance jumped from $1,947 in April 2020 to $2,443 in January 2022 — that’s an increase of 25.5%.

The average Gen Z credit score inched up from 677 to 679 between 2021 and 2022, which is a good sign, but it’s still the lowest among all age groups — and they’re using 23% of their available credit, the most of any generation.

The following is a primer that will keep you out of debt, in good standing and in control of your financial future.

If you don’t know much about credit cards other than that you want one, don’t submit an application just yet. If you have already, don’t do it again. By applying, you’re giving the bank permission to conduct a kind of credit background check called a hard inquiry or hard pull.

Whether you realize it or not, three organizations known as credit bureaus — Experian, Equifax and TransUnion — have been recording all of your important financial data and organizing it into a personal profile called a credit report. Everything on it will follow you for years, so don’t apply for credit willy-nilly. Just the act of applying goes into your report and can hurt your credit score, which is kind of like a numerical report card of your financial health.

You’re entitled to one free copy of your full credit report once per week — it was once per year pre-pandemic — which you can get from AnnualCreditReport.com. Free monitoring services like Credit Karma offer reliable unofficial reports. If you haven’t already, make this your first move. The information in your report will determine if you’re approved for a card and what your credit limit and interest rate will be. 

Reports can and sometimes do contain errors that can hurt your score — but you won’t know until you look. It’s not just credit cards. Landlords, mortgage lenders, insurers and employers will examine this information for the rest of your life. It’s impossible to be financially responsible if you don’t know and manage the contents of your credit report.

A data analytics firm called FICO maintains the most commonly used credit scoring system, which ranges from 300-850 — higher is better — and is grouped into five categories:

• Payment history — 35%: Making at least the minimum payment on time, every time is the single best way to build credit. Nothing is more important for your score. 
• Amounts owed — 30%: Lenders like to see lots of open credit with less than 30% of your available credit utilized.
• Length of credit history — 15%: The longer you use your credit responsibly, the higher your score will be. 
• New credit — 10%: Applying for new credit too frequently can look suspicious to lenders.
• Credit mix — 10%: Lenders like to see that you’re responsibly managing a blend of different kinds of credit, like auto loans, mortgages and personal loans.

Your income does not factor into your credit score, nor does your age, where you live, your occupation, employer or length of employment. But lenders can and do factor all those things into their decisions. While tax liens and civil judgments no longer impact your credit score, lenders can see them on your credit report and factor them heavily into their decisions. Things like race, religion, gender, marital status or sexual orientation are not factored into your credit score, and lenders are forbidden by law from considering them when making decisions.

There are all kinds of credit cards for all kinds of people, but the same basic rules always apply. It can be good to put some or even most of your purchases on a credit card, but only if you have the cash to pay off your statement balance in full every month. Do that, and you’ll avoid finance charges, but if you carry a balance, you’ll pay interest at whatever annual percentage rate (APR) your lender charges — and that interest will continue to compound and build until you settle your debt.

Every month, you’ll have to make at least the minimum payment, which is just enough to keep you in good standing in a jam but a terrible long-term strategy. People who don’t pay their balance in full carry a revolving debt, but those who pay only the minimum carry a revolving debt into eternity — and they’re the bank’s favorite customers.

According to Debt.org, it would take more than 13 years of minimum payments to pay off a $1,500 charge at an APR of 18%, and it would cost you $1,792.52 in interest — more than the original charge.

If you carry a revolving balance, the credit card company always wins, but if you satisfy your statement every month, you can turn the tables and take money from the bank in the form of cash back, airline miles, free hotel stays and other rewards.

Some cards give you points or cash back at a flat rate that’s the same for every purchase. If you’re really organized, you can get extra points for specific categories — like gas or groceries — that rotate throughout the year. Some cards charge annual fees, which only make sense if you use the card’s rewards enough to justify the expense. 

Many Gen Zers don’t have any credit history for a lender to examine, but an empty credit report isn’t the same as a bad one. Some lenders offer cards that are designed specifically to help cardholders get into good habits and build credit over time. Some are secured, meaning that you put money up in advance and that becomes your credit limit. But unlike a debit card, the issuer will report your on-time payments every month to the credit bureaus, which will help you grow your score. Other credit-building cards are unsecured, just like standard cards, including many cards designed for students.

If you do miss a payment, don’t panic. Your lender won’t report it to the credit bureaus until 30 days have passed since your due date. That means that if you forget to pay, you can avoid a hit to your credit score and a black mark on your report — and both are guaranteed if you miss a payment — as long as you settle up within a month. You will, however, almost certainly be hit with a late fee and perhaps other penalties.

If you don’t pay your bill on time, you can expect lots of phone calls and emails during that 30-day grace period. Don’t avoid them. It’s natural to want to hide your head in the sand if you fall behind on your bills, but communication is key. If you have trouble paying your bill — particularly if you can demonstrate hardship — your bank will work with you. 

If you simply ignore it and stop paying, your lender will report you as delinquent after 30 days, but this is still fixable over time. After 60 days, your credit will take a damaging hit that could take years to repair. After 90 days, some credit cards will write you off as a loss and sell your account to a collections agency — all will after 180 days — and when that happens, your credit will be shot and you’ll be a toxic borrower for years to come.

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