Why do Gen Zers love debit cards so much?

Debit cards are the most popular payment method for Gen Zers (those born between 1997 and 2012), according to a recent study by the prominent consulting firm EY (formerly known as Ernst & Young). According to the study, 69 percent of Gen Zers report using a debit card at least once a week, while only 39 percent frequently use credit cards (compared with 51 percent of other U.S. adults).

Further, some 46 percent of shoppers between the ages of 20 and 24, and 44 percent between the ages of 18 and 19, are more likely to use debit cards than other payment types when shopping digitally, according to Mercator Advisory Group. In older age brackets, no more than 35 percent said they favor debit cards for digital purchases.

So what’s the big deal with debit?

Bunita Sawhney, Mastercard’s executive VP of consumer products and processing, says that Gen Zers and millennials (the generation that directly precedes Gen Z) “are taking advantage of payment choice. They compartmentalize their money. They use different solutions for different types of purchases.”

Sawhney noted that groceries and gas are primary examples of everyday expenses that many people put on debit cards. Provided they have the available funds, many of these younger consumers seem eager to pay for these daily necessities with money that comes directly out of their bank accounts. They’re more likely, on the other hand, to use credit cards for larger purchases and discretionary items, such as travel and dining.

In this way, debit cards represent a long-standing, plain-vanilla payment method that has become trendy again. Innovative companies such as Acorns, Block (via its Cash App brand), Chime, Revolut and many others offer mobile-first, 21st-century debit cards that are especially popular among young adults. These accounts often appeal to consumers with targeted features such as early access to users’ paychecks and fee-free overdrafts.

Interestingly, the burgeoning buy now, pay later industry has gotten into the debit craze as well, with providers such as Affirm and Klarna extending their reach via debit cards. These represent a hybrid of sorts between traditional debit cards (which usually involve funds coming out of a checking account right away) and credit cards, which are typically paid back over time. In this case, Affirm and Klarna offer installment loans with fixed payback periods ranging from six weeks to as long as a year in some cases.

The benefits of payment choice

Managing money can be influenced by personal and cultural factors, according to Sawhney. She notes that many young adults “saw their parents struggle with credit card debt and want to avoid this in their own lives.”

I hear this quite a bit from Gen Zers and younger millennials. Many have substantial student loan burdens and are wary of using credit cards for this reason. Access to credit can be difficult, too, especially when you’re young. Lenders often want to see prior experience with credit before extending a loan. Credit card usage increases with age, from 69 percent of 18- to 27 year-olds, 73 percent of 28- to 43-year-olds, 76 percent of 44- to 59-year-olds and 83 percent of 60- to 78-year-olds, according to a recent Bankrate survey.

In fact, one of my younger brothers was afraid to get a credit card for several years after graduating from college, even though he was working full time and living self-sufficiently. He worried that he would get into trouble with a credit card, either by overspending or going into debt or both.

He finally decided to apply for a credit card in his mid-20s but wasn’t able to qualify for a traditional credit card at first (due to a lack of credit history), so he had to use a secured credit card as a stepping stone. These are low-risk products that typically require the user to put down a deposit equal to the credit line. After about six months of positive payment history, my brother was able to get his deposit back and graduate to a credit card with a larger, unsecured credit limit.

My advice on debit cards

I respect that different people have different opinions, but my advice is to use a credit card like a debit card. That is, pay in full so that you avoid credit cards’ high interest rates (the average credit card charges a record-high 20.75 percent) but also take advantage of credit cards’ many perks.

For example, when you pay with credit, you can earn valuable cash back and travel rewards. I’m also a big fan of credit cards’ fraud protections, dispute resolution processes, extended warranty coverage, purchase protection and travel insurance benefits. As long as you’re avoiding interest and not overspending, there’s a lot to like about paying with credit.

Building credit is important, too. Using a credit card responsibly can be a free way to establish and maintain a strong credit score. This will serve you well when applying for future loans and lines of credit. Good credit is also useful for securing an apartment lease and avoiding the need to put down a deposit when signing up for utility service. For better or worse, some employers even check credit reports to gauge prospective hires’ sense of responsibility.

While Sawhney, the Mastercard executive, is a proponent of payment choice, there’s one option she doesn’t like: cash. I asked her about the “cash stuffing” trend that Gen Zers have popularized on TikTok. Proponents advocate filling different envelopes with cash for different purposes – the monthly grocery budget, for instance. Or entertainment or dining out. The theory is that by compartmentalizing your money, you’re allocating your spending wisely. And when the envelope runs out, that’s it for that type of spending until the next month rolls around.

Sawhney hopes cash stuffing is a fad that peters out quickly. “There is a social cost to cash usage. Having more cash in the system is a burden on society,” she explained, noting theft and security risks and also citing the difficulty associated with moving physical money between banks, stores and other locations.

The bottom line

While personal finance is inherently personal, there’s a lot to like about paying with a credit card as long as you can do one important thing: pay in full each month. Provided that you’re able to avoid interest, credit cards work for you by providing better rewards programs and buyer protections than any other payment method. They also represent an easy, potentially free way to build and maintain a strong credit score.

If you’re a Gen Zer who is wary of credit cards, I’d suggest starting small. Use a credit card for a recurring expense or two and pay it off right away. Especially when you’re young, avoiding fees and building credit should be the main considerations. Over time, you can migrate more of your spending over to credit cards and gain even more benefits if you use credit smartly.

Have a question about credit cards? Email me at ted.rossman@bankrate.com and I’d be happy to help.