New studies show that Gen Z consumers, as well as the rest of the consumers, are heading in the wrong direction. Their typical credit scores have plummeted to 676, a three-point decline from last year. This decline represents the steepest annual drop of any age group since 2020. With the national average credit score at 715, Gen Z are far behind their peers.
Many reasons play into this drop, one main factor shines through. The resumption of student loan delinquency reporting is a major piece. Nearly a third — 34% — of Gen Z consumers, according to SmartAsset, still have open student loans. By contrast, only 17 percent of the general public bears such financial burdens. As these loans return to standard reporting, thousands of young borrowers are set up to be caught dangerously close to default on their loans.
Credit scores scale from a low of 300 to a high of 850. Your payment history is the most important factor in calculating your credit score. It is the most significant factor, accounting for roughly 35% of the total formula. Paying the minimum required amount or full balance on time has a major positive impact on credit scores.
Tommy Lee, senior director at FICO, emphasizes the importance of consistent payment behavior in maintaining or improving one’s credit score.
“The one most important factor in the FICO score calculation is whether you make your payments on time. And that’s about 35% of the score calculation.” – Tommy Lee
Lee does a good job of debunking the common misconception that credit scores are set in stone, explaining that they change constantly according to people’s payments.
“The FICO score is dynamic. It changes based on how you make your payments. So your score, if you want to maintain it or improve it, you can do so by exhibiting good credit behavior.” – Tommy Lee
Beyond payment history, credit utilization is a key factor in credit scoring. Most experts agree that you should keep your credit utilization in the 10%-30% range. In fact, they caution that maintaining a 0% utilization rate may hurt your credit score.
Courtney Alev, a consumer advocate at Credit Karma, highlights the unique challenges faced by Gen Z in navigating their financial landscape.
“They’ve had so many different ongoing causes of economic instability that have really been with them as they’ve been growing up; those factors make it a lot harder for this generation to stay financially stable.” – Courtney Alev
Gen Z is walking on financial eggshells each and every day. Given that, it’s incredibly important for them to be proactive to maintain and improve upon their credit scores. Through regular payments on this debt and keeping credit card balances low through these startup years, they can avoid further drops to their credit scores.
“You need to know where you stand to be able to take action.” – Courtney Alev
As Gen Z continues to confront these financial challenges, it remains essential for them to monitor and manage their credit scores actively. By making timely payments and maintaining healthy credit utilization levels, they can mitigate further declines in their credit ratings.
