A week after my ‘Gen X and Gen Y state of retirement ‘ post, one of the major credit bureaus (Experian) launched an infographic on the ‘state of credit ‘ of each generation.
Your credit worthiness and credit scores are extremely important in today’s economy. They will impact what kind of rate you get on mortgages, student loans, and other forms of credit, potentially costing/saving you tens of thousands of dollars over your lifetime.
Not surprisingly, Gen X and Gen Y have awful credit compared to the older generations, on average.
Well, lets look at this fancy infographic for a second and then dive in to some of the numbers. And I’ll even compare myself to the averages.
How My Credit Stacks Up to the Averages:
I’m officially Gen X, but close enough to Gen Y and have a lot of Gen Y readers here, so we’ll look at both. Before getting in to the credit score results and personal comparisons, versus the average, I thought it would be interesting to first compare my credit usage to the averages.
- Number of Credit Cards: Right now, I have 6 credit cards (just dropped a 7th). This compares to an average number of credit cards of 2.13 (Gen X) and 1.57 (Gen Y). Why do I have so many cards? Doesn’t the almighty Dave Ramsey say that is a bad thing? He does. But I think he’s wrong. I use credit cards for all of my living expenses and have one for each major spending category, which allows me to get an average of about 4% cash back (including 6% cash back on groceries ).
- Credit Limit: I have a total credit limit of $75,500 on my credit cards (and that just dropped by $10,000 because I cancelled a newer card I never use). The report did not list this metric, but if you look at the next two metrics, you can calculate it out to be about $14,440 for Gen X and $7,248 for Gen Y.
- Average Monthly Balance: I pay off my balance in full, every single month (versus the Gen X and Gen Y average balances of $5,343 and $2,682, respectively).
- Credit Utilization Ratio: I use about an average of $1,600 per month for a credit utilization ratio of 2.1%. This compares to an average of 37% for both Gen X and Gen Y. Obviously a huge difference.
Credit Score Averages:
Next, I’ll compare my credit score to the averages.
- TransUnion: You can get this score, for free, through Credit Karma. I’m at 769. Anything above 750 is considered “excellent”.
Here’s a chart
of TransUnion score averages from a screenshot in my Credit Karma account:
- Vantagescore: Vantagescore is another commonly used credit score that you can get for free through Credit Karma. I check in at 901, considered as “excellent”. The average Gen X’er is at 653 and Gen Y’er is at 628.
Here’s a chart of Vantagescore averages, from a screenshot of my Credit Karma account:
How are Credit Scores Calculated:
Each bureau has its own way of calculating credit scores. Here’s a recap of how Experian does it for VantageScore. VantageScore factors the following into your score:
- Payment History: Have you consistently paid your accounts in a timely manner?
- Utilization: How much of the total credit available to you are currently using?
- Balances: What is the total of your current and delinquent account balances?
- Depth of Credit: How long is your credit history and is there a varied mix of credit types?
- Recent Credit: How many recently opened credit accounts and credit inquiries do you have?
- Available Credit: What is the total amount of credit that you currently have access to?
Specifically, they are factored via the following breakdown:
How to Improve your Credit Score
What can we learn from this and some of the metrics you saw earlier?
- Payment history: I never have had a late payment. Important, as it makes up 28% of your score.
- Utilization rate is SIGNIFICANTLY lower than the average, which is a good thing – especially since it makes up 23% of the score.
- Balances: paid in full every month and not delinquent. Can’t do better than that.
- Depth of Credit: no current auto loans or student loans. Just credit cards and a mortgage history. I’m potentially getting punished a bit for not having much debt.
- Recent Credit: here’s one spot that you would think I might be getting punished. I have six credit cards, and half of them were opened within the last 16 months. However, as I noted previously, opening new credit cards and closing old ones hasn’t negatively impacted my credit score. This could be due to the higher available credit limit which has reduced my utilization ratio.
- Available credit: another area that I far exceed the average.
I’m not going to even begin to pretend that I have all the answers on how to improve your credit score. but my strategy of using a good number of cards that are paid in full each month, kept open, and with a low credit utilization ratio has seemed to have worked out pretty well.