November 17, 2023

Top Credit-building Tips for Generation Z

Generation Z represents the youngest generation of consumers. As a member of Gen Z, the financial choices you make now can have an outsized impact on your financial future. When it comes to credit, implementing responsible credit management strategies now can lead to better credit opportunities in the future.

In this article, we will explore where credit stands for Gen Z. Plus, you’ll find strategies to help you build credit.

Generation Z and Credit: An Overview

The Pew Research Center defines Generation Z as people born after 1996. While many members of this generation are still under 18, the older portion is already in their mid-20s. Throughout these early years of adulthood, Gen Z can make a wide range of financial choices that impact their future. How you choose to manage your credit when you are just starting out is one of the things that can have a big impact on your financial future.

Here’s a breakdown of the current credit situation for Gen Z.

Average Gen Z Credit Scores

According to Experian data, the average credit score for Gen Z was 679 in 2022. In contrast, the average credit score across consumers of all ages was 714. While an average credit score of 679 is lower than other generations, it still qualifies as a fair credit score.

Here’s a look at the average credit scores for other generations in 2022:

    Millennials: The average FICO score was 687 for Millennials.
    Generation X: The average FICO score was 706 for Generation X.
    Baby Boomers: The average FICO score was 742 for Baby Boomers.
    Silent Generation: The average FICO score was 760 for Silent Generation.

The average credit score tends to trend upward for older generations. Part of the reason for this trend is that the length of your credit history has an impact on your credit score. In general, a longer history of good credit management leads to a higher credit score.

Average Gen Z Debt

As Gen Z members start moving into adulthood, many take on debt. Of course, they aren’t alone in taking on significant debt. In fact, Experian found the average bank debt balance for Americans of all ages was $101,915. On average, Generation Z members have less debt and carry an average balance of $25,851.

Here’s a closer look at the average debt balances for Gen Z:

    Credit card debt: Gen Z carries an average credit card balance of $2,854. That’s lower than the average credit card balance of $5,910 across all consumers.
    Auto loan balance: Gen Z carries an average auto loan balance of $19,223.
    Student loan balance: Gen Z carries an average student loan balance of $20,468.

Due to the younger age of Gen Z, there’s not too much information available on average mortgage debt. Thanks to stagnant wages and increasing home costs, following in the footsteps of Millenials, Gen Z is less likely than previous generations to own a home.

Why Care About Credit?

When you are just getting started, building credit might be low on your list of priorities. After all, you likely have more pressing financial concerns, like making ends meet and building up your savings. However, it’s still important to practice good credit management strategies to build your credit score.

Here are a few reasons why a good credit score matters:

Access to Financing

It’s not a secret that life is expensive. And for most of us, it’s impossible to make major purchases without the help of a lender. For example, buying a home or vehicle in cash is out of reach for many of us.

A good credit score gives you access to financing opportunities. If you want to buy a home, most mortgage lenders aren’t willing to work with you unless you have a reasonably good credit score.

Plus, a good credit score gives you access to other kinds of loans, such as auto loans. Plus, a good credit score can help you tap into a premium rewards credit card that stretches your dollars further.

Interest Savings

Not only does a good credit score give you access to financing opportunities, but it can also help you unlock better interest rates. The right interest rate could lead to an affordable monthly payment and thousands of dollars saved over the life of the loan.

When you run the numbers, it’s easy to see how a different interest rate can make a big difference.

For example, let’s say Sally has a low credit score and takes out an auto loan for $20,000 with a 60-month term and an 8% interest rate. She would find a monthly payment of $405.53 and pay $4,331.67 in interest over the life of the loan.

In contrast, Susan has a high credit score. When she takes out a 60-month auto loan for $20,000, she unlocks a 5% interest rate. With that, she has a monthly payment of $377.42 and pays $2,645.48 in interest over the loan term.

Ultimately, Susan saves $28.11 per month and around $16,000 over the life of the loan.

Hidden Benefits

While a good credit score is directly tied to your ability to obtain financing, that’s not the only time a good score can come in handy. A good credit score can help you take advantage of the following benefits:

    Lower insurance premiums: In some states, insurers look at your credit scores when determining insurance premiums. In general, a higher credit score will lead to lower insurance costs.
    Housing opportunities: Beyond getting a mortgage, the right credit score can open doors to ideal rental opportunities. Many landlords will consider your credit score before moving forward with a lease.
    Limited deposit requirements: When you open a utility account or cell phone account, a good credit score can help you skip past security deposit requirements.
    Green light from employers: Some companies consider your credit scores when conducting a background check. A bad credit score could be a red flag to potential employers.

With such a broad range of impacts on your life, building a good credit score is a worthwhile financial goal.

How to Build Credit: Gen Z Edition

The basic principles of credit building remain the same for people of all generations. But since Gen Z is just getting started, implementing smart credit management strategies is especially important.

As you build credit, here are the top strategies to keep in mind.

Pay Your Bills on Time

Your payment history is the single most important factor in your FICO score. After all, a key measure of creditworthiness is whether or not you pay back lenders in the agreed-upon timeframe. With that, a history of on-time payments can have a positive impact on your credit score.

Make it a priority to pay your bills on time each month. If you have trouble keeping track of the deadlines, consider taking advantage of automatic payments. Most bill providers give you the option to make payments on an automatic basis. Once you set up automatic payments, you’ll never have to worry about missing a payment deadline again.

If you aren’t able to make a payment due to cash constraints, consider reaching out to the lender as soon as possible. In some cases, the lender might be willing to work out a special extension. That’s especially likely if you’ve never missed a payment in the past. It never hurts to ask!

Build a Budget That Works

As you get your feet wet in the world of credit, it’s important to lay a strong budgeting foundation. Access to a line of credit through a credit card can make it easy to overspend. But you can avoid the temptation by setting up a budget that works for you.

Contrary to popular belief, a budget shouldn’t force you to eliminate everything that brings you joy. Instead, a budget should help you eliminate spending that doesn’t matter to you in order to make room for the purchases that actually add value to your life.

Open Your First Credit Card

If you don’t have a credit card, opening your first one is a big step in your credit-building journey. When you have the credit card in hand, do your best to pay off the balance in full each month. Credit cards have notoriously high interest rates. But if you pay off the balance by the deadline each month, you won’t have to worry about paying sky-high interest rates on your spending.

Before you dive in, be honest with yourself. If the temptation to overspend with an open credit limit is too strong, that’s okay. Instead of opening a credit card, work on mastering your spending until you get to a point where you can feel comfortable carrying a credit card in your wallet.

Become an Authorized User

If you become an authorized user on a credit account in good standing, this could add history to your credit profile. While becoming an authorized user isn’t the solution for everyone, it might be worth a try.

You can become an authorized user on a family member or friend’s account. Just make sure the account is in good standing and has a healthy payment history and low utilization.

Avoid Taking on Too Much Debt

Some debt can help you make progress toward life goals. For example, you might take out a home loan to accomplish the goal of homeownership or take out student loans in pursuit of a degree. But too much debt can be a drain on your financial situation.

If possible, avoid taking on more debt than you can comfortably afford. If your budget feels a big pinch because of your monthly debt payments, you might have more debt than you should.

Consider a Credit-builder Loan

A credit-builder loan is a credit product specifically designed to help you build credit. When you take out a credit-builder loan, you won’t get access to the loan amount right away. But you will start to make monthly payments immediately. With each payment, the principal amount is tucked into a savings account. At the end of the loan term, you’ll get access to the savings you’ve built along the way.

Along the way, the lender will report your payment information to the credit bureaus. If you make on-time payments, a credit-builder loan can help you grow your credit score. But if you don’t make payments on time, you could end up hurting your credit score through a credit-builder loan.

Grow Your Income

When you are jumping into the job world, you might start out with a relatively low salary. Everyone has to start somewhere. If possible, take steps to grow your income over time. You could choose to focus on growing your income through career advancements. But another option is to build multiple streams of income.

If you pick up a side hustle or two, you won’t be alone. According to a 2022 Zapier study, 61% of Gen Zers have one. The extra income can go a long way toward building savings and maintaining a good credit score.

Build Savings

Relying on credit to cover emergencies can lead to higher debt burdens and negative credit score impacts. When you build your savings, you have a cushion to fall back on when life throws something unexpected your way.

Most experts recommend building an emergency fund of three to six months’ worth of expenses. While that lofty goal is a good target, any amount of savings can go a long way toward protecting your credit score.


How Do You Build Credit in Gen Z?

A few ways to build credit while you are young include paying your bills on time, using a credit card responsibly, and building your financial literacy.

What Is the Average Credit Score for Gen Z?

On average, Gen Z members over the age of 18 had a credit score of 679 in 2022.

The Bottom Line

If you are a member of Gen Z, implementing smart credit-building strategies now can open doors to a stable financial foundation in the future. As you grow your credit score, be patient with yourself. It will take time to build a top-notch credit score. But every smart credit move you make is a step closer to an excellent credit score.