Millennial and Gen Z credit scores will keep improving

Credit scores have long been viewed by critics as arbitrary—mostly because there are so many factors that affect them—and some people even view them as discriminatory. Yet they’re a necessary evil to get what Americans want most: homes, cars, and lower insurance rates.

It can take years to build a robust credit file needed for what’s considered a “good” score (above 700), which many young consumers don’t have. But a report by Open Lending and TransUnion, one of the major credit reporting agencies, shows millennials and Gen Zers are “poised” to move up credit tiers. That may be hard for these younger generations to believe, however, because they just don’t feel as good about the economy and their finances, a phenomenon that’s been dubbed the “vibecession.”

It’s no wonder millennials and Gen Zers don’t feel great about their credit scores. After all, many lenders are “hesitant to extend loans” to borrowers with “thinner credit files,” said Kevin Filan, senior vice president of marketing at Open Lending. These are consumers with low credit scores or who just haven’t had years of credit to prove they’ll pay their loan back.

However, millennials and Gen Zers are actually a “strategic consumer segment [that] shows immense potential for upward credit mobility compared to their older counterparts,” Filan said in a statement. “The financial institutions that intelligently address these ‘emerging prime’ borrowers through comprehensive data analysis and decisioning can generate higher-yielding loan opportunities and long-term customer loyalty.”

A breakdown of younger generation credit scores

In 2024, the average credit score in the U.S. was 715, according to a January report by Experian, one of the major consumer credit reporting companies. That score is considered to be right at the top of the “good” credit band, just a few points shy of an “excellent” credit score.

Millennials and Gen Zers, however, average lower credit scores. Millennials average a credit score of 690, and Gen Zers come in at 680. For reference, the qualifying credit score for most conventional home loans is 620, according to Rocket Mortgage.

There are five main factors that affect your credit score, Kendall Meade, a senior financial planner with personal finance company and online bank SoFi, told Fortune. This includes payment history, credit utilization, credit history length, credit inquiries, and types of credit.

Interestingly enough, the Open Lending and TransUnion report also shows millennials and Gen Zers are actually poised to improve their credit scores more quickly than Gen X or other older generations. Using data from more than 4 million U.S. consumers, they found that 30% of millennial and Gen Z thin-file consumers moved up credit tiers within two years, while just 22% of older generations did. That largely has to do with credit length and payment history.

That’s because younger generations are starting from scratch, Joseph Camberato, CEO and founder of business lending firm National Business Capital, told Fortune. They start out with a blank slate and comparatively not much debt.

“When they handle their first credit card or auto loan responsibly by paying on time, their credit score shoots up quickly. This good track record makes it easier for them to get loans in the future,” Camberato said. “On the other hand, older generations like Gen X and baby boomers might have piled up more debt over the years, which takes longer to deal with on their credit reports. Plus, as they slow down on spending, they’re not as focused on boosting their credit.”

But just because someone is a member of a younger generation doesn’t automatically mean their credit score will improve. They still have to pay off their credit cards in full each month—and charge only what they can afford, Meade warned.

“While this trajectory is good news for younger consumers, it is very important that they stay on top of their debts,” she said.

A version of this story originally published on Fortune.com on March 25, 2024.