Banks Face New Gen Z Credit Test as BNPL Use Spreads

Generation Z now holds the lowest average credit score of any generation, averaging 676 according to FICO, which represents a three-point decline over the past year.

This downward trend accelerated after student loan delinquency reporting resumed in February 2025. Following that resumption, 14.1% of Gen Z borrowers experienced credit score drops of 50 points or more.

The struggle with credit scores comes as more young consumers enter the financial system. The number of Gen Z consumers with credit files increased from 20 million in 2021 to 34.5 million in 2024, though many are entering with low limits and thin credit histories.

According to research from PYMNTS Intelligence, this economic pressure has led Gen Z to treat payment methods as a deliberate credit management exercise. Rather than choosing tools based on convenience, these consumers are assigning specific financial roles to different payment instruments to ensure survival and long-term credit health.

Gen Z consumers are primarily splitting their activity between buy now, pay later (BNPL) services for immediate liquidity and fixed card installment plans to protect and build their credit scores.

The Role of BNPL as a Liquidity Bridge

For Gen Z, BNPL has evolved into a low-friction tool for instant access to funds. More consumers in this age group report using BNPL than those who use credit cards, with 42% stating they have used the service at least once.

The primary driver for this preference is the speed of the process. A PYMNTS Intelligence report titled Speed vs. Strategy: How Consumers Choose Between BNPL and Card Installments found that 55% of Gen Z consumers cite easy approval and speed as their main reasons for using BNPL, a rate significantly higher than other age groups.

This reliance is often born of necessity. Approximately 57% of BNPL users rely on the service to finance purchases they could not otherwise afford upfront.

48% of Gen Z consumers have utilized credit options to cover basic needs following a reduction in income or job loss, transforming BNPL from a checkout convenience into a short-term liquidity bridge to manage income gaps.

Structured Credit Strategy via Installment Plans

While BNPL is used for immediacy, credit card installment plans are used for long-term damage control. Approximately 68% of Gen Z cardholders opened accounts specifically to build a credit history.

PYMNTS Intelligence research indicates that 43.7% of Gen Z consumers use installment plans specifically to manage their credit scores and limits. This strategy is critical because Gen Z faces significant constraints compared to older generations; their median credit limit is $4,500, while millennials have a median limit of $16,300.

Low limits mean that ordinary spending can quickly push credit utilization past 30%, and thin credit files make these consumers more vulnerable to the impact of missed payments.

Gen Z views installment plans as structured tools that provide more control over budgeting than traditional revolving balances. This preference is evident in market data, as credit card installment plan usage outpaces BNPL usage by nearly 3-to-1.

Risks of Financial Fragmentation

Despite the strategic intent, the use of BNPL often undermines Gen Z’s credit-building goals due to financial fragmentation. Because these plans are often spread across various apps and merchants, users struggle to track their obligations.

The PYMNTS Intelligence Tracker Pay Later’s Next Chapter: Why Credit Unions Are Rethinking Installment Payments found that 25% of BNPL users are unsure of how many payments they have remaining or when their next payment is due.

This lack of visibility contributes to a 39% late-payment rate among Gen Z, the highest of any generation. 27% of Gen Z users report feeling regret once the cumulative cost of these fragmented payments impacts their budget.

Opportunities for Financial Institutions

The divide in how Gen Z uses payment tools creates an opening for banks to integrate these needs into a single ecosystem. To attract this demographic, financial institutions can focus on three primary areas:

• Credit-Building Incentives: Banks can market installment plans explicitly as credit-building tools, highlighting how disciplined repayment improves scores—a benefit typically absent from 0% interest BNPL apps.
• Consolidated Financial Management: Banks can reduce financial fragmentation by offering tools that allow Gen Z to see all repayment obligations and reminders in one place.
• Education and Rewards: Institutions can differentiate themselves by offering products that reward healthy credit practices, such as autopay and low balance maintenance, with positive credit reporting.