Over the last four years the number of Generation Z consumers with credit files grew by over 76%, increasing from 20 million in 2021 to 34.5 million in 2024, and is outpacing the Silent Generation and Millennials in terms of credit file presence. This influx of Gen Z consumers entering the credit system is creating both a challenge and an opportunity for banks.
Despite their limited credit histories, Gen Z’s influence is extending into major sectors like real estate and auto, making it vital for banks to understand their financial behavior and habits. What’s more, banks must meet these younger customers’ demand for seamless and personalized service that caters to their specific needs and lifestyles.
Gen Z faces an array of financial challenges
Compared to previous generations, Gen Z is facing distinct financial pressures that are influencing the way they interact with credit. Economic uncertainty fueled by rising inflation, high interest rates, increased living costs, and stagnant wages has significantly impacted Gen Z’s credit card utilization and consumer debt. According to Equifax data, credit card balances among younger generations grew considerably from 2019 to 2023, hinting at increased card adoption along with higher balances among existing cardholders.
The issue surrounding affordability will likely be amplified with the end of administrative forbearance on student loans. The resumption of repayments means many Gen Z borrowers will face added financial strain and potential impacts to their credit scores.
With these challenges in mind banks should be asking themselves, “How can we serve Gen Z consumers in a risk responsible way?” Ultimately, banks that use alternative data, AI-driven insights and personalized financial tools are in a better position to serve Gen Z while mitigating risk.
Using alternative data to better serve Gen Z borrowers
Traditional credit scores can fall short when evaluating Gen Z consumers, many of whom have thin or non-traditional credit history. For example, while Gen Z’s average VantageScore of 665 is still at the lower end of the “very good” range, it may nonetheless reflect their limited credit history.
Given this dynamic, lenders may want to adjust their credit scoring systems while weighing the associated risks and benefits. Banks can support responsible and effective decision-making by layering alternative data sources like rent payments, utility bills, and employment or education history to build a more complete financial profile. In the U.S. most adults have at least one utility or cell phone bill in their names, which provides a valuable insight into assessing creditworthiness for thin or no credit files.
Along with considering the breadth and reliability of data sources, it’s important for banks to strike a delicate balance between seamlessly integrating alternative data into their existing process while ensuring strong security and consumer privacy standards.
Risk assessment is a challenge of its own, particularly during periods of potential financial distress. Real-time data enables banks to monitor cardholders for any indications of potential financial distress. Identifying warning signs in a card holder’s spending or repayment behavior enables banks to intervene before late payments escalate into delinquencies or charge-offs. Lenders that use these insights can also provide better customer service for their Gen Z customers by offering personalized products and services such as credit line adjustments, spending alerts and payment plans.
Alternative data can play a vital role by enhancing underwriting accuracy without lowering credit standards and responsibly expanding credit to a larger pool of Gen Z borrowers. Lenders can go a step further by using automated verification technology coupled with alternative data to expand credit access and determine a borrower’s repayment ability.
Automating the lending process to meet customer expectations
Overreliance on manual processes can bog down the loan decisioning process and place an undue burden on customers. Ultimately, this friction can drive away younger customers, leading to lost opportunities. Younger generations expect to get what they need quickly and easily, this includes mortgage approvals, auto loans and credit card access.
Lenders shouldn’t have to rely on borrowers to provide physical documentation like W-2s, proof of residency and pay stubs. Automating key parts of the loan decisioning process, like verification of income and employment (VOIE), gives lenders access to comprehensive insights that lead to smarter, more accurate lending decisions.
From a risk perspective, embedding VOIE reduces reliance on outdated manual processes that expose lenders to more risk, lowering the chance of falsified or incorrect documentation. Additionally, real-time verification gives lenders the flexibility to re-check and update a borrower’s employment status at any time in the loan process, helping to flag unforeseen changes that could impact loan eligibility.
To better serve Gen Z customers, banks should look for ways to evolve beyond legacy systems and underwriting practices. By incorporating alternative data and automated verifications into their processes they can meet the unique needs of a younger customer base.
Shelly Nischbach is Senior Vice President and General Manager, Verification Services (Auto, Consumer Finance, Debt Management, Card) at Equifax.
