As Gen Z grows up, its credit is lagging behind

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• Generation Z is finding it harder to maintain good credit than older generations.
• This is due to inflation and higher levels of credit card debt and student loans.
• To build good credit, pay bills on time, keep your credit utilization low, and reduce your debt. 

Today, many Generation Z members — generally classified as those born between 1997 and 2012 — are struggling to keep their credit scores high.

Factors like high inflation, student loans, higher interest rates, and slower wage growth are impacting Gen Zers' ability to make ends meet. This also make it harder to use credit responsibly and structure long-term financial goals.

Why Gen Z's credit is falling behind

Your credit score is a three-digit number ranging from 300 to 850, and it's used to quantify your credit risk — the likelihood that a you will fail to pay back what you've borrowed.

One of the most important factors in determining your credit score is on-time payments, followed closely by credit utilization (what percentage of your available credit is being used). Potential lenders require a strong history of on-time payments and a low credit utilization ratio to qualify for the best interest rates— or, in some cases, to offer credit at all.

While all other generations' debt amounts is trending down, Gen Z credit card debt is increasing, and it's falling behind on payments faster than any generation.

High inflation and the Federal Reserve raising interest rates are also having an impact on credit scores. Gen Z is faced with paying back larger loans and more credit card debt, especially for those carrying a balance every month.

Why good credit matters

Generally, a good credit score falls between 670 to 739, according to the FICO model. The benefits of a good credit score include better approval odds when applying for a loan, credit card, or line of credit. Your credit score is even reviewed for auto and home insurance, utilities, and apartment rentals.

Plus, the better your credit, score the better interest rates you will receive. When you have a good credit score, you become more attractive to lenders. What lender wouldn't want to lend to and make interest — which is profit — to a borrower when they know they will get paid back?

There are also more rewards and perks when you have good credit. Most rewards credit cards (which earn points or cash back on your purchases) require a higher credit score to be approved.

Steps to building good credit

Build Credit for Your Future

Self is one of the best credit builder loans and can help you build credit for the things that matter. No credit score is needed to get started. Learn more in our Self Credit Builder review.

Given that credit is so important to your financial life, it's better to build good credit from the beginning. Here are a few steps:

1. Make all payments on time

This is the no. 1 thing you can do to build good credit. Your credit report and score is like a report card on how you pay your bills. Paying your bills on time every month shows lenders that you will pay them back if they lend you money or extend credit.

2. Keep your credit utilization low

Remember, your credit utilization — the amount of available credit you are actually using — is one of the factors that determines your credit score. Don't max out your credit cards.

For example, if you have a $2,000 credit limit, you should only carry up to a $600 balance, or 30% of the limit at most. It's even better if you can pay off the entire balance every month. It shows lenders that you're not relying too heavily on credit and that you can use credit responsibly.

3. Pay off existing debt

One of the best things you can do to protect your credit is reduce your debt load. If you have high credit card balances with expensive interest rates, it will become more difficult to pay them off down the road. Take care of that now and eliminate that debt.

Of course, this is all easier said than done, especially for Gen Zers contending with high inflation and other factors outside of their control. If you're having trouble paying off your debt, reach out to your lender before you miss payments. Your lender wants to work with you to stay on track and keep your accounts current.

If you have multiple debts to pay off, you could also consider a debt consolidation loan. If you qualify, you can consolidate all of your debt into one monthly payment and this could have a positive effect on your credit score.

Check Your Loan Rates

Many of the best personal loans will allow you to check your personalized loan rates before you apply, allowing you to protect your credit score against unwanted hard inquiries. Get prequalified for loans without impacting your credit score.