Credit Scores: What Worked 10 Years Ago vs. What Gen Z Needs To Do Now
Some of the fundamentals of holding a good (or even excellent credit score) are timeless and continue to be relevant today: Keep your payments on time to produce a strong payment history, keep your credit utilization low so you don't look overleveraged, hold a mixture of credit via various loans, and add new credit avenues from time to time.
The thing is — and something younger Americans in particular should be aware of, as they'll be the ones maturing within this new credit score environment — the game has changed somewhat.
Credit Scoring Models Have Grown More Nuanced
President Donald Trump signed the Credit Score Competition Act into law in 2018, which directly required the Federal Housing Finance Agency (FHFA) as well as Fannie Mae and Freddie Mac, to create a process for Fannie Mae and Freddie Mac to improve credit score models to more accurately reflect the more complex landscape of the 21st century.
And while FICO Score 8 remains the most dominant version in the lending marketplace, newer models such as FICO SCORE 10T and VantageScore 4.0 — the changing of the guard on the horizon being represented here — are much more likely to utilize trended data, diving deep into how your balances and attendant payments have fluctuated over the lifetime of your borrowing.
The New Credit Scoring Models Use Better Data Sets
To give one example where this could be a game changer: In the past, one might have been able to quickly improve their credit score by making a massive lump-sum payment against the principal before a credit snapshot was taken. Now, the growth of your principal over time may actually be much more detrimental — it would have been better to make regular, aggressive payments versus that growing balance.
Newer models can also avail of Buy Now, Pay Later data to gain further insight into real-time borrowing situations. With BNPL becoming a commonplace method of purchase, it's absolutely vital that Gen Z consumers (who engage with BNPL more frequently than older cohorts) and all borrowers more broadly ensure they can meet their payment plan obligations without penalty.
Rent and utility payment histories can also be made available to lenders via these newer models, in some — but not all — cases. This means that any missed rent payments or falling behind on your utility bills, could negatively impact your credit score under this emerging paradigm.
Build Healthy Credit (But Not Too Much) To Avoid Rejection
To improve your odds of a successful credit application, keep the fundamentals above in mind while also avoiding:
Excessive Hard Credit Inquiries
When you apply for a new loan, lenders will often purchase your credit report in order to determine eligibility. Too many hard credit inquiries suggests that you are frequently reaching out for more funds, and piled-up rejections can more adversely cause your credit score to dip.
A Thin Credit File
A bit of tried-and-true wisdom points to building a lengthy credit file, usually via the early usage of secured credit cards, retail store cards and dedicated credit builder loans. These vehicles can help you avoid the trap of having an insufficient credit record or thin credit file, which means lenders may reject you for not having enough of a financial track record for them to justify taking the risk of lending you funds.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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