By Francis Creighton

Building a healthy credit file looks different at each stage of life as every person’s priorities, investments and opportunities continually evolve. Whether it’s paying off student loans, buying a home or preparing for retirement, your credit file reflects your stage of life. Each generation’s financial wellness concerns vary based on unique characteristics and milestones. Here are some key credit considerations for consumers by generation.

Generation Z

Gen Z (born between 1997-2012) is questioning standards set by previous generations, including reconsidering financial investments like attending college or buying a house, among others.

Past generations have often built their credit histories by making bigger purchases and taking out loans for homes or cars, but data shows that Gen Z is saving more than it is spending. Although Gen Z’s ‘minimalist mindset’ could be viewed as beneficial today, this could present challenges to building credit for the future in a traditional way. If younger generations are required to make a large purchase, they are more prone to use digital payment methods and buy-now-pay-later plans instead of charging to a credit card.

Additionally, this generation is entering adulthood with the financial challenges brought on by the pandemic, as well as strong concerns over the economic implications of climate change. Gen Z may be asking themselves, “How do I continue to be conscious about my savings, but also have a healthy level of investment and risk to build credit and secure good loans down the road?” or, “If I don’t have student loans or plan on buying a car/home in my 20’s, does that put buying my dream home in a decade at risk?” 

Gen Z can proactively avoid these difficult questions by finding alternative ways to build credit. If an individual does not have a college or auto loan in their credit report, registering for a credit card and making on-time payments can help effectively expand one’s credit portfolio. Showing lenders, landlords and other financial institutions that Gen Zers can manage balances and credit lines can ease this generation into future investments as they get older.

The most important things Gen Zers can do right now are: establish a no-fee credit card account now and keep that card forever (a CREDIT card, not a debit card).  Length of time someone has had an account is a key factor in credit scores, and this can have a big impact later on in life.  The other thing people at this age should do is begin saving.  Small amounts of money at this point will add up over time.  Investing that money now in the stock market, while it is down especially, puts the consumer in a position to see gains later in life.  And having some money available in case of emergency is a key piece of any good financial plan.

Millennials

Millennials’ (born between the 1980s and early 2000s) saving habits are just as good or better than former generations. Despite this, the generation has more debt than Gen Xers or Baby Boomers had at the same age, which is largely due to soaring prices of college tuition and an over reliance on credit cards.  Having lived through the 2008 financial crisis, millennials are also renting longer and buying houses later in life. Mortgage payments have historically been key to building a strong credit profile, which puts into question how this generation will strengthen their credit history and build wealth.

As an effort to advance financial accessibility and equity more broadly, the credit reporting industry has been working to incorporate expanded data in credit reports. Data like rental and utility payment history are increasingly being included on reports to showcase healthy financial habits outside of historical mechanisms.

With some of their top savings priorities being for emergency funds and retirement, millennials face financial questions and concerns like, “If I want to wait to purchase a home until my late 30’s, how do I build my credit history now so that I can get the best mortgage loan possible?” They also consider, “Will my poor financial habits and credit card use in my early 20’s affect my ability to get a good auto or mortgage loan in my 30’s?”

Millennials can alleviate financial anxieties by creating a financial plan. Creating an organized means to build credit can prepare individuals for potential uncertainties. The most important step before devising a credit roadmap is to check credit reports to understand where gaps exist and to confirm credit history accuracy.

In this changing economic environment, all consumers, but especially Millennials, need to take a hard look at their finances and figure out where the best bang for the buck is given limited resources.  If a consumer has a lot of credit card debt, it may make more sense to pay that off in an increasing interest rate environment then to invest it in a savings vehicle, as paying off a card is akin to receiving the interest rate as a rate of return.  So if you pay $10,000 of credit card debt off, that’s the equivalent of earning a roughly 17% return on your investment.  Everyone’s financial picture is different, and retirement saving is critical, but those credit card bills are going to take a bigger and bigger chunk of your income in this kind of interest rate environment.

Gen X

Gen Xers (born between the mid-1960s to 1980) currently make up about 35 percent of the U.S. workforce and many are currently caregivers for both their children and their older parents. Because of their widespread responsibilities, they are often called the “sandwich generation.” As a result, this generation is generally saddled with more debt and faces financial concerns and questions like, “How will taking out a loan for my child’s college tuition affect my credit score and my ability to get a good mortgage loan if I want to downsize in a few years?” and, “Should I give my teenager a credit card under my account? How will their credit card use affect my credit integrity?”

As with any generation, paying off debts is an important part of building credit. Yet, it is extremely helpful for Gen Xers to have open conversations with their children and parents about the specific financial planning each group should do to lessen the future financial burden. For instance, teaching children about saving and credit card use, as well as discussing financial planning during retirement with older parents can help Gen Xers limit impending concerns on their own finances. Limiting future debt that can worsen current debts is key for proactive best practices.

Baby Boomers

The Baby Boomer (born between 1946 and 1964) generation grew up and has lived much of their adulthood in a strong economy. Today, this group is financially stable and has higher savings and disposable incomes compared to other generations – baby boomers account for 70 percent of the U.S. disposable income.

Although they are traditionally financially stable, there are still concerns regarding living on a more limited income of Social Security and retirement savings. With much of this generation nearing or in retirement, they might be wondering questions like “Now that my income stream is changing with retirement and I won’t be charging as much on my credit card, how will that impact my credit score?” or “If I’ve paid off my mortgage and am looking to downsize or buy a vacation home, what kind of loan should I be looking for? How can I continue to build credit for unforeseen needs, such as healthcare expenses, down the line?”

Creating a financial plan still proves to be a viable way for older generations to anticipate through the transition to retirement. They can deal with a “thin” credit file by identifying where to downsize, how to utilize their savings strategically and even invest in a financial adviser who specializes in managing finances during retirement.

Take Action

Credit considerations are not one-size-fits-all, but no matter what age you are, consumers must check their credit reports regularly to understand their credit history. Knowing what is on your credit report can inform the personalized decisions you make to build your credit for a successful and financially stable future.

The three main credit bureaus Equifax, Experian and TransUnion have extended free weekly credit reports through the end of 2022, so American consumers can recover from hardships brought on from the pandemic and other unforeseen circumstances. Consumers can check their credit reports free weekly through the end of 2022 at AnnualCreditReport.com. The consumer reporting industry is dedicated to meeting consumers where they are and educating them on the resources available to improve their credit.