"Gen Z's Rising Debt: Insights and Management Strategies"

Dive into the complex landscape of Gen Z's mounting debt burdens, uncovering the reasons behind their surge. This comprehensive guide offers a deep understanding of the challenges this generation faces and provides invaluable insights into effective debt management strategies. From exploring the factors contributing to this trend to offering practical tips and resources, this resource equips Gen Z with the knowledge and tools necessary to navigate their financial responsibilities with confidence and success.

Younger Canadians could be experiencing a more significant impact from increased interest rates compared to older groups. According to a recent report from TransUnion, millennials hold the largest portion of debt in the country, while Gen Z is witnessing one of the most substantial increases in outstanding balances. 

The report, released on Tuesday by the credit bureau, examined the Canadian consumer credit market. It revealed that total debt surged to $2.38 trillion in the first quarter of 2024, up from $2.32 trillion during the same period last year. This rise is largely attributed to ongoing higher living costs and pressure from interest rates.

Newcomers and Gen Z, individuals born between 1995 and 2004, led the surge in outstanding balances with a 30% annual increase in the quarter. This rise was primarily driven by credit cards or personal loan products, which saw respective increases of 18% and 11% in the first quarter of 2024. Matthew Fabian, director of financial services research and consulting at TransUnion Canada, suggested that the higher cost of living, combined with limited disposable income among younger generations, may be contributing factors.

"Now they're faced with trade-off decisions: should I prioritize filling my gas tank or allocating more to pay down my credit card? This dilemma becomes more pronounced when interest rates rise, as the cost of the debt they carry increases, leading to higher minimum payments. Consequently, they're compelled to allocate a larger portion of their finances towards servicing that debt."

Fabian highlights that part of the issue may stem from a deficiency in financial literacy, particularly concerning revolving balances. He emphasizes that even if a younger individual obtains a credit card with a $500 balance and a minimum payment of $30, failure to pay more than the minimum could result in substantial debt accumulation due to interest charges.

How to manage debt

Young Canadians have options when it comes to avoiding or managing debt. Rubina Ahmed-Haq, a personal finance expert and host of For What It's Worth on the Corus Entertainment radio network, advises taking a proactive approach. She suggests analyzing the affordability of any credit application in the long term, considering not only existing debts but also other expenses like rising grocery costs, childcare expenses, or potential obligations related to aging parents. This holistic perspective helps in making informed financial decisions.

Struggles with debt extend beyond Gen Z. Millennials, too, face significant challenges, holding 27% of credit accounts and shouldering a substantial share of debt, totaling $911 billion. Matthew Fabian, speaking to Global, notes that mortgages account for approximately $700 billion of this figure, underscoring the magnitude of financial obligations among this demographic.

TransUnion attributes the increasing credit needs of millennials as they age to factors such as mortgages, childcare expenses, and supporting aging parents. Rubina Ahmed-Haq observes that while millennials grapple with debt while establishing their lives, managing expenses like mortgages and childcare, Gen Z faces distinct challenges. She recommends providing guidance to Gen Z while allowing them room to learn from their mistakes.

Ahmed-Haq highlights the importance of allowing young people to navigate credit card usage and repayment independently, fostering greater awareness and responsibility in managing balances. Fabian from TransUnion notes that Gen Z is increasingly opting for personal loans over credit cards, citing uncertainty surrounding credit card interest rates. 

This trend suggests a preference for fixed monthly payments, such as those offered by buy-now-pay-later schemes or point-of-sale loans. However, Fabian remains optimistic, mentioning economists' expectations of future interest rate reductions. He suggests that with inflation easing, rate cuts could provide relief in the near future.

Source: globalnews‍