Understanding Gen Z’s Unique Credit Pathways and What’s at Stake for Banks
Gen Z, the newest generation to enter the financial spectrum, is challenging traditional credit pathways with their financial behavior. A key insight reveals that Gen Z’s frequent deposit shifts to investment accounts and their high usage of non-traditional payment platforms are undermining these pathways. This presents both challenges and opportunities for banks, who risk losing deposits and future lending revenue if they fail to adapt to this generation’s distinct financial habits.
According to industry reports, Gen Z consumers understand the importance of good credit scores but often struggle to build them. This issue is further complicated by the high usage of non-traditional payment platforms among these young individuals.
A recent report by Cornerstone Advisors, sponsored by Bloom Credit, found that Gen Zers and millennials (ages 21 to 44) move deposits to investment accounts around three to four times per month. Interestingly, these two demographics account for nearly 60% of the deposit displacement tracked since 2020. Simultaneously, a FICO report revealed a three-point average decrease in credit scores among Gen Z consumers from April 2024 to April 2025, the largest year-over-year score decrease for any age group since 2020.
The Opportunities Amidst the Risks
While these statistics may indicate a potential risk for banks, they also present a significant opportunity. The FICO report noted that Gen Z consumers have the most potential for score improvement, with a consistently larger percentage of young borrowers gaining a 50-plus-point year-over-year score increase compared to the rest of the population.
However, banks need to address the fact that approximately 25% of the American adult population, estimated to be around 57 million individuals, have a subprime credit score. This proportion increases to one in three among Gen Zers, according to a 2022 Experian report.
Addressing Gen Z’s Credit Concerns
Christian Widhalm, CEO of Bloom Credit, highlighted that many Gen Z financial service customers are highly aware of their credit score, or lack thereof, and are eager to improve it. Companies like Bloom Credit, Experian, Ocrolus, Plaid, Prism Data, and Nova Credit offer credit-building tools to banks and credit unions. Earlier this year, Navy Federal Credit Union partnered with Bloom to offer its members debt-free options for building credit scores using regular bill payments.
“People want a new way of establishing their creditworthiness that doesn’t require taking on debt,” Widhalm explained. “They want credit for positive financial behavior they’re already demonstrating.”
However, traditional credit scoring still plays an indispensable role in financial assessments, particularly for Gen Z customers seeking significant purchases like an apartment lease or auto loan. Widhalm acknowledged that having a thin-file credit history, a usual phase for younger borrowers, has become a prolonged problem for Gen Z consumers due to an affordability crisis.
Gen Z’s Financial Experimentation and Anxiety
Widhalm noted that as Gen Z consumers are turned away from credit products, they are resorting to nontraditional options for everyday transactions. Tools like Cash App and Venmo are gaining popularity among this generation, while traditional banking institutions risk losing their patronage.
Bill Handel, general manager and chief economist at Raddon Research, sees Gen Z’s financial services behavior defined by two themes: experimentation and anxiety. He commented, “There’s a lot of anxiety about whether they’re making the right decisions simply because of what they’ve grown up in. They’re looking for somebody that they can trust in terms of the financial decisions they make.”
Handel believes that the shift in Gen Z’s approach to credit is an expected evolution, posing a greater threat to smaller banks and credit unions than to large banks. “The real challenge is for the community banks and the credit unions. They’re going to have to really work hard to present themselves effectively to this generation,” he concluded.
With Gen Z’s unique financial behaviors and credit pathways, banks must adapt to cater to this generation’s needs or risk losing future lending revenue and deposits. The challenge lies in the balance between embracing new credit-building strategies and maintaining traditional credit risk assessments.
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