Banks Face New Gen Z Credit Test as BNPL Use Spreads

Generation Z now holds the lowest average credit score of any generation, 676 according to FICO, down three points in one year.

That number dropped further after student loan delinquency reporting resumed in February 2025, with 14.1% of Gen Z borrowers seeing their scores fall 50 points or more.

Against that backdrop, how Gen Z chooses to pay has become less about convenience and more about financial survival. The number of Gen Z consumers with credit files has surged from 20 million in 2021 to 34.5 million in 2024, and they are arriving in the credit system with thin files, low limits and a lot to lose.

Faced with these pressures, the decision of how to pay has evolved into a deliberate credit management exercise. Gen Z consumers are assigning distinct financial roles to different payment tools. They use buy now, pay later (BNPL) for speed and short-term liquidity, and fixed card installment plans for building the credit scores they cannot afford to lose.

To reach this generation, banks need to understand what is driving this split and where their products fit into it.

The BNPL Role: Speed and Instant Access

For Gen Z, BNPL has become the ultimate low-friction access tool. More of these consumers say they use BNPL than those who say they use credit cards, and 42% report using it at least once.

When faced with a purchase, the primary driver for choosing BNPL is speed and instant approval. The PYMNTS Intelligence report “Speed vs. Strategy: How Consumers Choose Between BNPL and Card Installments” found that 55% of Gen Z consumers cite speed and easy approval as their leading reason for using BNPL, a figure that is disproportionately higher than other age groups.

This is particularly true for the 57% of users who rely on BNPL to finance purchases they otherwise could not afford up front. In an economy where 48% of Gen Z have turned to credit options to make ends meet following job loss or income reduction, BNPL shifts from a checkout convenience into a short-term liquidity bridge, helping users manage income gaps.

The Installment Role: Structured Credit Strategy

When Gen Z turns to credit card installment plans, the mindset shifts from immediacy to long-term damage control. With 68% of Gen Z cardholders opening accounts specifically to build credit history, this is a generation that watched older peers get locked out of mortgages and car loans for waiting too long and is not making the same mistake.

PYMNTS Intelligence research found that for 43.7% of Gen Z consumers, the leading motivation for using installment plans is managing credit limits and scores. The stakes are high. Gen Z holds the lowest average credit score of any generation at 676, with a median credit limit of just $4,500 compared to $16,300 for millennials. At that ceiling, ordinary spending pushes utilization past 30% fast. Thin credit files amplify every misstep. A single missed payment hits a 23-year-old’s score harder than it would someone with 20 years of on-time history behind them.

When student loan delinquency reporting resumed, 1 in 7 Gen Z borrowers saw their score drop 50 points or more. Installment plans, used correctly, are one of the few levers Gen Z can pull to change that trajectory.

Gen Z perceives installment plans as structured borrowing tools that offer more control over budgeting and payment structuring than traditional revolving balances. This strategic use of credit is reflected in the data. Credit card installment plans outpace BNPL usage nearly 3-to-1 across the market, PYMNTS Intelligence found.

Why This Categorization Is Happening

The split is a calculated response to a genuinely hostile economic environment. By routing smaller, immediate needs through BNPL and larger or essential expenses through installment plans, Gen Z is trying to hold onto the credit scores it has while it slowly builds more. The problem is that the BNPL side of the equation keeps undermining the plan.

However, this strategy can be risky. Because BNPL plans are often spread across various merchants and apps, users face financial fragmentation. According to the PYMNTS Intelligence Tracker “Pay Later’s Next Chapter: Why Credit Unions Are Rethinking Installment Payments,” 25% of BNPL users report being unsure of their next payment date or how many payments remain.

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

How Banks Can Capitalize on This Trend

The role division Gen Z has built represents an opening for financial institutions. Gen Z already wants what banks offer on the installment side. The question is whether banks can make their products visible, useful and clearly better than the BNPL alternatives before this generation defaults to habit.

Banks looking to act on this should consider the following.

Lead with credit-building perks: Since Gen Z uses installments for strategy, banks should explicitly market these plans as credit-building tools. Highlighting how disciplined repayment helps their score is a benefit that 0% interest apps often lack.

Consolidate fragmented financial views: The greatest pain point for Gen Z is managing payments across multiple third-party apps. Banks can use their position as the primary financial home to offer repayment planning and reminders. By giving Gen Z a way to see all their obligations in one place, they can reduce Gen Z’s problem of fragmented finances.

Provide financial education and rewards: Gen Z is hungry for tools that help them manage their credit scores, yet BNPL rarely contributes to credit-building. Banks can differentiate themselves by offering installment products that explicitly reward disciplined repayment with positive credit reporting, and encourage healthy credit practices like autopay and keeping balances low.