Many members of Generation Z are entering adulthood within the next few years and they’ll likely make big purchases along the way. The youngest credit-eligible generation should know that potential lenders or creditors will check their credit score to possibly determine if they’ll become responsible debtors. The average credit score has increased again, and Gen Z members need to become aware of their credit scores if they plan to make a big purchase by taking on a mortgage.
FICO reveals an all-time high average credit score
The Fair Isaac Corporation, commonly known as FICO, published a report last September that the average credit score on a national level is 706. The lowest credit score in FICO is 300 while the highest is 850. A potential borrower may get better deals from lenders if they have a credit score in the mid- to high-700s or above. A lender considers borrowers as “low risk” if they have a good to excellent credit scores. FICO Scores and analytics vice president, Ethan Dornhelm said: “at over 700, you will qualify for just about any credit at favorable terms.” This could be a challenge for young individuals who have just landed their first job or those who still don’t have a credit history.
Although the legal age to apply for a credit card is 21 years old, 18-year old individuals can still apply for a credit card and start establishing their credit history by either presenting proof of income, or asking their parents to cosign for them. It’s important to note that credit scores are generated from credit reports which detail a consumer’s financial footprints. Simply put, a person will only have a credit score once he or she already has a credit history.
Credit scores are consumers’ gateway for major transactions
Almost often, consumers will need their credit scores when making large purchases. Mortgage lenders, auto lenders, and some landlords will require credit scores to determine consumers’ creditworthiness. Mortgage lenders, for example, will get potential borrowers’ credit scores from all three major credit bureaus and use the average score for qualification.
According to myFICO®, 90 percent of top lenders in the U.S. use FICO Scores when making lending decisions. It’s a quick, consistent, and objective way for lenders to evaluate the credit risk of a potential borrower.
The perks of having a better credit score
Borrowers with poor credit score may still get loan approval from some lenders. However, these borrowers are often charged with additional fees to possibly reduce the lenders’ risk of approving them of the loan. Lenders offer lower rates to borrowers with better credit scores because they have more confidence that these borrowers will likely repay their dues in a timely manner. Borrowers with better credit scores get a better annual percentage rate, which means lower monthly payments.
Here’s the Loan Savings Calculator of myFICO® to better illustrate how a potential borrower is charged with an average annual percentage rate depending on his or her credit score. Young borrowers may want to improve their credit scores first if they want to get better rates when they’re ready to take on a mortgage.
Every consumer has several credit scores
Major credit reporting bureaus, Experian, TransUnion, and Equifax, summarize consumer credit reports using FICO. This means that every consumer will have three varying credit scores simply because each of the credit reporting bureaus use a different FICO Score version. Every year, these credit reporting bureaus provide consumers a free copy of their credit report. Consumers need to leverage this to verify the reports’ accuracy, especially if they’ve become a victim of identity theft.
Final thoughts about credit scores
Members of Generation Z may find it a challenge to improve their credit scores as the median credit score has increased. Lenders use credit scores as a yardstick in determining the risk of potential borrowers. Borrowers with better credit scores get favorable rates because lenders believe they’ll likely repay their dues on time.