Why Millennials Have the Worst Credit Scores and How They Can Raise It
NEW YORK, March 14, 2023 (Newswire.com) - Credello: A study by the credit reporting bureau Experian found that Millennials have the lowest average credit score of any previous generation since the beginning of credit scoring. Why is this, and what does that say about the future of lending?
A quick primer on your credit score
Your credit score is a number that lenders use to determine your creditworthiness for loans, credit cards, etc. However, some employers will also check your score, especially if you're applying for a banking or government job.
What is the range of possible scores?
Depending on the reporting bureau (there are three: Experian, Equifax, and Transunion), your score could range anywhere from 300 - 850, with 850 being the best score.
When does your credit score update?
Your credit score is typically updated monthly, but there's no set date, as each lender reports on different days.
What factors determine your credit score?
- The number of on-time payments you've made
- Your credit utilization ratio
- The types of lending products you have (loans, credit cards, etc.)
- The number of times you've applied to borrow money in the past three years
- The average age of your credit
Why do Millennials have the worst credit scores?
Experian found that the average credit score for age groups goes like this:
- Baby Boomers - 709
- Gen X - 650
- Millennials - 625
(Gen Z was not a part of the survey)
There are a few reasons why Millennials may be having such a hard time getting higher scores:
- They've dealt with two major economic downturns in their prime earning years
- Schools not prioritizing financial education
- Unstable work options causing fluctuations in income
- Increases in the cost of education leading to more student loan debt than before
- Inability to invest in appreciating assets (real estate, retirement, etc.) due to rising costs
- Wages not rising in line with prices and inflation
Interestingly, one consideration few manage to consider is that all of these factors are making Gen Y less willing to take the risk of borrowing money. Since their aversion to debt causes them to apply for fewer loans and credit cards, their mix of lending products is lower, lowering their credit scores.
What should the younger generations do to improve their scores?
Now that Millennials are the majority of the workforce, things are slowly changing. New lending options, started by Millennials, are coming into the mix and making reliance on the traditional credit score less of a contributing factor for borrowing money. The credit bureaus are also changing their scoring models to account for current market conditions and the hardships many face today, including removing medical debt as a factor and including "buy now, pay later" options in your credit mix.
However, that doesn't mean Generations Y and Z should disengage from building their credit and improving their finances. The emphasis for those in these age groups should be on saving more money to help them weather rocky economic conditions and less on increasing their debt loads. As the report from Experian shows, Gen Y seems to be right on pace with this, meaning that it may end up being more on the reporting agencies to adjust their factoring methods than on Millennials trying to fit into an economic model that isn't realistic for them.
The bottom line
While Millennials may have the lowest average credit scores, that doesn't mean they're doomed. Instead, it seems that the continuing lowering of scores for each generation shows that traditional scoring factors aren't in line with the reality of today's economy and that credit bureaus may need to adjust their methods instead of waiting for Millennials and Gen Z to adjust theirs.
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