Gen Z Faces Significant Drop in Credit Scores Amid Debt Crisis

Gen Z has experienced the steepest decline in credit scores among all generations over the past year, primarily due to the impact of student loan debt. A recent report from credit scoring company FICO reveals that while the national average credit score fell by two points to 715, Gen Z’s average score dropped three points to 676, marking the largest year-over-year decrease since 2020.

Credit scores, which range from 300 to 850, are crucial for lenders assessing the likelihood of repayment on loans. The report highlights that 34% of Gen Z consumers currently have open student loans, a stark contrast to 17% of the overall population. The decline in credit scores is largely attributed to the resumption of student loan delinquency reporting following a prolonged suspension during the COVID-19 pandemic.

In March 2020, the U.S. Department of Education paused federal student loan payments, providing borrowers relief during economic turmoil. Although payments were set to resume in 2023, a one-year grace period was granted by the Biden administration, which concluded in October 2024. This summer, the Trump administration restarted the collection process for outstanding student loans, with plans to garnish wages and tax refunds for those who remain in default. Approximately 5.3 million borrowers may face wage garnishment if their loans continue to go unpaid.

The report indicates that many young consumers are struggling to keep up with their financial obligations amid a challenging job market and high inflation. A low credit score complicates access to important financial services, including car loans, mortgages, and credit cards. As Courtney Alev, a consumer advocate at Credit Karma, noted, “They’ve had so many different ongoing causes of economic instability that have really been with them as they’ve been growing up; those factors make it a lot harder for this generation to stay financially stable.”

Despite these challenges, young consumers possess significant potential for credit score improvement, according to Tommy Lee, senior director at FICO. If your credit score has recently declined, experts offer several recommendations to help regain financial footing.

Understanding Your Credit Score

It is common to feel apprehensive about checking your credit score, but Alev emphasizes the importance of knowing where you stand. “You need to know where you stand to be able to take action,” she stated. Companies like Experian, FICO, and Credit Karma provide free access to credit scores, enabling consumers to track their financial health.

While a credit score is essential for maintaining a healthy financial profile, Alev reminds individuals that it is merely a number and does not define their worth. One of the most critical factors affecting credit scores is timely payment history, which constitutes approximately 35% of the score calculation.

If you are managing multiple credit card payments and other debts, setting up automatic payments may help ensure that you make payments on time. Additionally, keeping your credit utilization low and avoiding new debt can positively influence your credit score. Credit utilization refers to the percentage of credit currently used compared to the total credit available. Experts recommend maintaining this figure between 10% and 30%, as having a utilization rate of 0% may not be beneficial.

Building Better Financial Habits

For those grappling with existing debt, it is advisable to refrain from acquiring additional debt if possible. Credit scores fluctuate based on financial behavior, and Lee advises implementing new, responsible habits to improve your score. “The FICO score is dynamic. It changes based on how you make your payments. So your score, if you want to maintain it or improve it, you can do so by exhibiting good credit behavior,” he said.

As Gen Z navigates a complex economic landscape, understanding and managing credit scores will be crucial for their financial future. With the right strategies, this generation can work towards improving their creditworthiness and enhancing their financial stability.