A Gen Z’s guide to credit scores

Members of Generation Z (Gen Z) are the latest cohort of credit users. They range from teenagers just beginning to think about credit cards, to students taking out their first loans, to older young adults with homeownership on their minds.

For many Zoomers, the world of credit is still new. Adult Gen Z members have the lowest credit score (average credit score of 679) out of all the generational cohorts as they build up their credit history and learn to navigate the increasingly digital world of loans, credit cards and payments.

Gen Zers starting out on their credit journey should pay attention to their score, their accounts and on building a positive credit history to get off on the right foot and build a credit score that will last a lifetime.

What your credit score means to you

If you’re a member of Gen Z (born between 1997 and 2012), you’re probably starting out on your credit journey. You may have only one credit card, if you have one at all. Student loans are likely top of mind, while a house loan may be farther off.

While your credit score will play a huge role in “big ticket” loans like mortgages, paying attention to your score now will make achieving your future financial goals — like buying a house, getting a car lease or starting a business — easier.

The key thing to focus on with your credit score is establishing a history. If you’ve never taken out a loan or had a credit card, you’ll have no credit history at all which is a red flag to lenders.

Without a credit history, you’ll have no credit score, and lenders won’t have a way to evaluate whether you’ll pay back your balance. This can prevent you from qualifying for credit cards, getting a loan and even getting an apartment.

This is why you should start your credit history as soon as possible and keep your credit report clean.

What your credit score impacts

Your credit score can affect your finances beyond qualifying for a loan or a credit card. How much you pay lenders, the credit cards you access and even the space you live can all be impacted by your score (or lack thereof).

Loan terms

Lenders will typically require a minimum credit score to even qualify for a loan. Having no credit to your name, or having a low score, means that lenders will deny your loan application.

Having a co-signer with a good credit score can help you qualify, with the caveat that your co-signer will be responsible for paying off the loan if you default and take the consequent hit to their credit score.

Even if you do meet the minimum score threshold for a loan, having a better credit score can get you better loan terms. Lenders will offer you lower interest rates, saving you money over the course of the loan.

Credit card eligibility and perks

Your credit score plays a big role in the cards you qualify for.

When you start out, you’ll probably only qualify for a secured card, a student card or have to be named as an authorized user on someone else’s card.

Secured credit cards are a type of credit card backed by a cash deposit. Your card limit will typically be the same amount as the deposit, and you may be charged an annual fee. You’ll also have limited, if any, card rewards.

Student cards also have low limits but can come with more rewards and don’t require a deposit. You must prove that you’re enrolled in an institution of higher education like a university, community college or graduate school.

Authorized users require that a cardholder sign them onto their card’s account. As an authorized user, you’ll get your own card with the same perks as the main cardholder and build a credit history. However, the main cardholder will be in charge of making payments on time, and your balance will contribute to the main cardholder’s balance.

As you build up your credit history and raise your score, you’ll start qualifying for cards with higher limits and cushier perks like cash back, purchase points, sign-on bonuses and other exclusive rewards. You’ll also get higher limits, which will help your utilization ratio.

Even if you’re not interested in credit card rewards, having a credit card is necessary for certain activities like booking a hotel room or renting a car.

Leasing a car

With car rentals and leases, the dealer will run a credit check to see if you’re a high or low-risk renter. Like with a loan, if you don’t have enough credit history, or if your score is too low, your application will be denied.

Similar to a loan, you can get a co-signer on your lease if your score is too low, so long as your co-signer agrees to take responsibility for the lease if you fail to make payments.

You may also get better lease terms if you have a higher credit score, like lower fees and a wider selection of vehicles to choose from.

Apartment screening

Many landlords and property managers will run a credit check if you want to rent an apartment or living space in order to see if you’ll pay your rent on time.

Different landlords will have different requirements for credit. If your score is low or if you have a limited history, your application may be denied.

You may be required to provide a recommendation or payment history from a previous rental, or you may also be required to put down a larger deposit. While no or low-score rentals do exist, not having a good credit score when you rent an apartment can greatly limit your options.

What to watch in your credit score

Your credit score is compiled of several factors that credit bureaus use to calculate your score. These factors include your payment history, the average age of your credit accounts, your utilization ratio, credit mix and new credit inquiries.

Here are how these factors affect your credit score and what you can do to account for them.

Average age

The average age of your accounts makes up 15 percent of your FICO score. When you apply for your first card or loan, the age of your accounts will be very low. This represents a risk to lenders, which is why having a low age of accounts can lower your credit score.

When you open your first account, the timer starts on your account age. Every year on the account contributes to your overall age of accounts.

While you can’t make time go any faster, there are a few ways you can help build up your average age.

If you’re paying rent or utilities, you can report your payments to a credit bureau. You can also apply for a starter credit card in order to establish a long-term account. This can include a secured card or a student card, which have a lower threshold of entry for new credit users.

You can also become an authorized user on someone else’s credit card. The positive history on the card will count in your favor on your credit report and help build up your age.

Utilization ratio

Utilization ratio refers to how much debt you’re carrying in proportion to how much credit you have available across your revolving credit accounts — in other words, your credit cards.

To calculate your utilization ratio, simply take the total balance on your credit cards and divide it by your total credit maximum. For example, if you have a balance of $1,000 on one credit card with a $5,000 limit and a balance of $3,000 on a card with a $4,000 limit, your total utilization ratio would be 44 percent ($4,000/$9,000).

Your utilization ratio is weighted 30 percent to your credit score, trailing only behind your payment history in terms of how much it contributes to your score.

There are a few ways you can manage your utilization ratio. First, be careful when accumulating a balance on your credit card. While your credit score will only temporarily dip if you pay off the balance each month, carrying a balance and letting it accumulate will drag down your score over time.

Besides keeping your balance low, you can also increase your limit.

If you get a raise or get a new job with a higher income, be sure to report it to your credit card providers who can increase your credit limit in proportion to your increased income. Your payment history, utilization history and overall score can also be a factor in this.

You can also apply for new cards, the limit of which will contribute to your overall available credit.

Payment history

Your repayment history plays a huge role in how your credit score is calculated since it’s a key indicator of how reliably you’ll pay your debts. Weighted at 35 percent of your score calculations, paying on time can make a massive difference in your score’s trajectory.

Both your installment loans (which include student loans, mortgages and auto loans) and your revolving credit (credit cards) will require payment as long as you maintain a balance.

Your installment loans will typically have a set payment each month, while your revolving credit will typically have a minimum payment based on your current balance. You can also opt to pay off your balance in full, which will keep your utilization ratio down.

Making your payments on time isn’t always easy, but it should be a top priority. Be careful with your credit card usage and track your spending so you don’t end up with a balance at the end of the month. Make sure you put your debt repayments ahead of nonessential expenses. If you’re having trouble making payments, contact your lender for a deferment option or to adjust your payment plan.

If you miss a payment by a few days, it won’t necessarily affect your score, though you may incur a late fee. If 30 days go by and you haven’t made a payment, you’ll receive a negative mark on your credit report.

Missing several payments can end up in collections, which will majorly drag down your score.

Credit mix

Your credit mix accounts for 10 percent of your score calculation. Lenders want to see that you have a mix of loan types and that you can meet the obligation of paying them off.

When you start out, you’ll likely have only one or two kinds of credit on your account. As you apply for more cards and take out loans, your credit mix will improve. If you’re just starting out on your credit journey, this may take some time.

Secured and student cards can act as a springboard for your first revolving credit accounts, but installment loans can be a little harder to procure.

If you have federal student loans, you can start paying them off early to establish a payment history. Another option to consider is a passbook loan, which uses your savings as a way to secure the loan while you establish a payment history. These can come with a lower interest rate than a personal loan, though you will still be paying interest for the loan’s duration.

Hard inquiries

Credit inquiries are used by lenders, credit card companies, landlords/property management companies and others to pull your credit history and evaluate if you’ll be a trustworthy borrower or tenant.

While a soft inquiry won’t impact your credit score, a hard inquiry will drop your score by a few points. One or two hard inquiries won’t have a massive impact, but several in a short period of time can quickly tank your score, which is why you should avoid applying for multiple cards or loans at a time.

How to boost your credit score

Raising your credit score isn’t a one-and-done task you can do in a week. Building good habits around your payments, your credit utilization and your applications for credit can set you up for long-term success with your credit score.

Take these steps to boost your credit score:

• Open your first line of credit. If you don’t already have a credit history, start now. You can begin by taking out a secured or student card, becoming an authorized user on someone else’s card or taking out a loan with a co-signer.
• Establish a payment history. Making your payments on time is a huge part of building your score. Factor your payments into your budget and set up automatic payments.
• Get a good mix of credit. Plan out when and how you’ll start your first installment loan, whether it’s a student loan, an auto loan or otherwise, and raise your score to qualify or see about getting a co-signer.
• Report your rent and utility payments. As long as you haven’t missed any payments, self-reporting can help establish your payment history.
• Watch your utilization ratio. Try to keep well within the limits of your credit cards and, if possible, pay off the balance each month.
• Space out your hard inquiries. Don’t apply to a bunch of new credit cards in rapid succession. Try to space out activities that will incur a hard inquiry, like applying for a lease or getting a personal loan.

Credit-building tools

There are multiple tools you can use to keep an eye on your credit score and build a positive history, many of which are available digitally.

For knowing your credit score

Knowing your credit score is an important part of staying on track with your goals. There are a few ways you can find out your credit score, both for free and through paid options.

First, you can request your credit report once yearly from the three credit bureaus — Equifax, TransUnion and Experian — or from FICO. There are also third-party credit score agencies that can pull your credit score for free in exchange for you receiving affiliate offers based on your score.

Your bank or credit card provider may also provide you with free access to your credit score, alongside credit alerts and monitoring services that can come with your card perks.

Finally, if you’re working with a credit counselor, a credit monitoring or credit repair service, you’ll have your score monitored, pulled and evaluated on a regular basis as you work to fix your report.

For making your payments on time

Budgeting and payment tracking apps can help you stay on top of your finances and ensure you can pay your bills.

Apps such as PocketGuard can help track your spending, alert you when you’re approaching your financial limits and sort your monthly bills into priority categories for payment. This way, you can track all your spending in one place and keep your credit balance manageable.

Credit card companies will also often offer spending trackers and budget tools online and in-app, allowing you to track spending for each card you own. You can also sign up for text, email and mobile alerts that remind you about upcoming payments, card limits and charges over a certain threshold.

For reporting your payments

While you can’t report your payment history directly to any of the three credit bureaus, there are third-party services that can report your utility, cellular and rent payments on your behalf.

Experian Boost, for example, lets you connect your cellular and utility account payments to your credit report, while services like PayYourRent and RentTrack can report your rent payments.

For monitoring and repairing your credit

If you’ve been a victim of identity theft, or if your credit score has taken some serious damage from a bankruptcy or several missed payments, you may want to consider working with a credit monitoring or repair company.

Credit monitoring services will keep an eye on your credit report and alert you to any changes on your account, including inquiries, changes to your address, missed payments, new accounts and more.

Credit repair takes this a step further by combing through your credit report for inaccurate entries such as falsely reported missed payments, entries with the wrong dates or addresses and more.

Lexington Law, for example, works with a team of experienced attorneys and paralegals to clean up your credit report, potentially helping you boost your credit score by disputing the false information and having it removed from your history.

If you’re looking to clean up your credit history and get a fresh start, consider working with a credit repair company so you can put your best foot forward in your credit journey.

The bottom line

Gen Zers of all ages should focus on their credit score, as their accounts, payment history and other factors can play a huge role in their finances.

By building up positive activity on your account, being strategic about your credit applications and using digital tools to monitor your score, you can start off right with your credit score and set yourself up for success throughout your financial lifetime.