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Our children have watched our borrowing habits, and now they’re loading up on debt

We have some early indications of how kids raised in an era of free and easy borrowing handle credit themselves.

It's not going especially well.

The credit-reporting firm TransUnion says the country's credit profile over all was in reasonably good shape in the fourth quarter of 2017, especially in light of recent interest-rate increases. But there were some worrying results among borrowers who are part of Generation Z, which means they were born between the mid-1990s and the mid-2000s.

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According to TransUnion, members of Gen Z can be as old as 23 or 24 and together account for 7 per cent of credit consumers. The total number of Gen Z borrowers was up almost 36 per cent on a year-over-year basis in the final three months of last year. Eighty per cent of Gen Z debt is on credit cards, while car loans account for most of the remaining amount.

TransUnion has only been tracking Gen Z as a distinct group for a year or so, which means it's too soon to draw any firm conclusions. But the Q4 snapshot from last year shows Gen Z is increasing its borrowing at a much faster rate than the rest of the population and doing a worse job of making payments on time.

Rookie borrowers are prone to mistakes – there's nothing new in that. "They're figuring out what a late payment means," said Matt Fabian, director of research and industry analysis for TransUnion Canada.

But there are signs that Gen Z's borrowing habits are about more than just youthful obliviousness. "This is the first generation that is fully immersed in digital," Mr. Fabian said. "There's more access to things from a credit perspective." For example, there are apps such as digital wallets that allow users to "walk around and tap for things." Previous generations didn't have access to this technology in their formative years as borrowers.

TransUnion says the average debt-delinquency rate for the country fell 0.23 of a percentage point to 5.3 per cent in the fourth quarter, while Gen Z alone rose 0.39 points to 5.85 per cent. Being delinquent on a debt means being 90 days or more late in making a payment. The average nationwide non-mortgage debt balance grew 4.3 per cent to $29,312, while Gen Z surged 22.9 per cent to $6,871.

The as-yet-unanswered question about Gen Z is the extent to which their financial habits were influenced by borrowing conditions in the formative years between their teens and adulthood. Low interest rates have shrunk the cost of many types of borrowing (not credit cards) and carrying debt is the new normal. "One of the things that is unique about Generation Z is that they've never been in a credit environment where rates went up," Mr. Fabian said.

It's important for all of us that Gen Z learn the right way to handle credit. TransUnion says this group accounts for 25 per cent of the population today and will soon grow to 30 per cent. Bad borrowing habits in a group this big could hurt the entire economy.

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Rookie borrowers who mishandle credit hurt themselves, too. Credit cards are the most accessible borrowing tool for this group, and also the easiest to fall behind on. In doing so, borrowers incur interest at parasitically high rates of close to 20 per cent in many cases. By comparison, homeowners can get a home-equity line of credit at a rate in the neighbourhood of 4 per cent these days.

Another risk for beginner borrowers is that they hurt their credit score, which is a rating of how reliable they are in repaying debt. A good credit score helps you get the lowest possible rate when buying a house or car, or setting up a line of credit. A weak score could mean you pay a higher interest rate, or that your credit application is rejected.

Mr. Fabian noted that while there's more access to credit and credit-based payment options today, there are also more tools for monitoring credit scores. For example, some banks, online lenders and websites such as Credit Karma let you monitor your credit score at no cost. These tools can quickly and effectively show the damage done by making late payments on debt.

For now, let's grade Gen Z on credit with an I for incomplete. There's still time to improve.

Personal Finance columnist Rob Carrick encourages the use of robo-advisers to cut through the complexity of getting started investing in Exchange Traded Funds. The Globe and Mail
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