A recent report highlights that Gen Z has experienced the most significant drop in credit scores among all generations this past year, largely attributed to student loan debt.
According to data from FICO, the average credit score across the nation decreased by two points this year. However, Gen Z’s average score fell by three points, now standing at 676, marking the steepest decline since 2020.
Credit scores, which range from 300 to 850, help lenders assess a borrower’s likelihood of repaying loans. The report noted that 34% of Gen Z consumers currently have outstanding student loans, compared to 17% of the overall population. This issue is compounded by reports of delinquent loan payments.
The U.S. Department of Education had paused federal student loan payments in March 2020 to ease the burdens caused by the pandemic. Although payments were set to restart in 2023, the Biden administration granted a one-year extension ending in October 2024.
Additionally, the Trump administration resumed collecting unpaid loans over the summer, introducing measures such as wage garnishments for those in default.
Roughly 5.3 million borrowers could potentially see their wages affected by these actions. The report suggests that young consumers are finding it increasingly challenging to manage timely payments due to a tough job market and rising inflation.
A lower credit score can make acquiring car loans, mortgages, credit cards, or insurance more complicated or expensive.
Experts emphasize that the economic instability faced by Gen Z throughout their upbringing has created a more challenging financial landscape for them. However, there is a silver lining: this generation is also the most likely to improve their credit scores, as noted by FICO senior director Tommy Lee.
If your credit score has taken a hit, here are some suggestions from experts:
Understanding Your Score
Many people fear checking their credit score, but avoiding it isn’t advisable, according to Aleph. Knowing your score, whether positive or negative, is essential for future planning.
“We need to identify where we can make changes,” Aleph stated. Services like Experian, FICO, and Credit Karma offer ways to check your score for free.
Your credit score plays a critical role in maintaining your financial health, but it’s just a number and doesn’t define who you are.
Timely Payments Matter
One crucial factor affecting credit scores is paying bills on time, whether it’s the minimum amount or the full balance. “Timely payments influence about 35% of your FICO score,” Lee explained.
If you’re managing multiple credit card bills, Aleph suggests setting up automatic payments to help ensure you don’t miss any due dates.
Maintain a Low Credit Balance
To improve your score, try to keep your credit utilization low and avoid taking on new debt. Credit utilization refers to the percentage of available credit you are currently using.
A good utilization percentage typically falls between 10% and 30%. It’s generally advisable not to use all your available credit, but avoiding new debts altogether when possible is best if you’re struggling.
As credit scores fluctuate with your financial behaviors, Lee recommends that if you’re unhappy with your current score, you work on new financial habits. “FICO scores are dynamic and can improve with responsible credit behavior,” he said.
