4 Ways a Personal Loan Can Help Gen Z Boost Credit Scores

Born between 1997 and 2012, Gen Z ranges from kids just entering their teens to young adults approaching 30. Many are just starting their financial journeys. Others are already well established. Some are struggling with the burdens of debt and money stress — and many from all of those groups might benefit from a personal loan.

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It Can Establish a Record of On-Time Payments It Can Lower Their Credit Utilization Ratio It Can Add to Their Credit Mix It Can Help Eliminate High-Interest Debt

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While more borrowing might feel like exactly what they don’t need, here’s how the right personal loan could be an excellent tool for increasing their credit scores to start building or rebuilding their financial profiles.

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It Can Establish a Record of On-Time Payments

According to FICO, payment history accounts for 35% of your credit score. No other factor carries more weight. A personal loan can help Gen Zers with limited credit histories establish a pattern of paying their bills on time. For those who have been at it longer, the responsible use of a personal loan can build on their already solid payment histories.

Every on-time payment makes you more attractive to lenders who prioritize payment history above all else when gauging a borrower’s risk level. Each payment also reduces your debt, which can boost your score even further.

It Can Lower Their Credit Utilization Ratio

If they use a personal loan to pay off credit card debt, it will reduce the amount of credit they’re using and expand their open credit. That lowers their credit utilization ratio, which accounts for 30% of their score, second only to payment history. It’s one of the fastest and easiest ways to boost your score quickly.

It Can Add to Their Credit Mix

Lenders prefer borrowers with a history of using various types of loans responsibly. A personal loan can join auto loans, mortgages, credit cards or any other kind of loan to the mix, diversifying a Gen Zer’s overall credit profile and increasing their score. Credit mix accounts for 10% of your score.

It Can Help Eliminate High-Interest Debt

According to the St. Louis Fed, the average credit card APR is 21.37%. Revolving balances compound daily, with today’s interest added onto the principal and tomorrow’s interest calculated based on that larger sum. It’s a trap that’s hard to escape by design, and high-interest credit card debt can snare young adults and stifle their financial growth through their 20s, 30s and beyond.

However, the average personal loan rate is only 11.66%. Additionally, personal loans typically have fixed interest rates with set, predictable payments, making budgeting easier than with variable-rate revolving debt. By using personal loans to pay off high-interest credit cards, Gen Zers can cut their finance charges by nearly half and consolidate several monthly bills into one.

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