Gen Z Is Poised to Spend More on Debt Than Others. It Could Derail Retirement.

The Fair Isaac Corporation created the most commonly used credit scoring model in the country. The three-digit FICO score, which has a range from 300 at the low end to 850 at the high end, is a weighted composite of a borrower’s credit risk — that is, the likelihood that they will fail to pay back what they borrow. The scoring model includes five types of data: The most important is payment history, which amounts to more than one-third of the score, followed by the amounts owed, length of credit history, new credit and the mix of different types of credit.

While these conditions aren’t age-specific, Gen Z is at a distinct disadvantage because 15 percent of a credit score is derived from the length of a borrower’s credit history. The average credit score for adults 25 and younger is 679, compared with 714 for all Americans, according to the credit reporting bureau TransUnion. On a scale that ranges from 300 to 850, 679 is high enough to qualify someone for many loan types, including conventional mortgages, but it’s not good enough to get the best interest rates.

Young adults who are Black and Latino face even greater challenges. The Urban Institute, a think tank, found that young adults between ages 21 and 24 who live in communities that are predominantly Black have average credit scores of 597, which sharply limits their opportunities to borrow — and improve those scores.

Margaret Libby, the founder and chief executive of MyPath, a nonprofit promoting economic mobility, said that some common credit-building recommendations for young people, such as being added as an authorized user on a parent’s credit card, were less accessible for young adults of color as well as those in lower-income communities. “It’s an equity issue, it’s a real equity issue in this space,” she said.

For young adults with little credit history, other attributes of their credit score take on outsized importance. “This is one of the categories where what a young consumer can best do in this category is building their credit and building their credit history,” said Ethan Dornhelm, the vice president of scores and predictive analytics at FICO.