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Credit and home buying: What each generation should think about

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Homeownership is a lifelong journey that looks different for everyone, especially depending on your stage of life and financial goals.

How each generation thinks about building credit and wealth varies, particularly with respect to homeownership. Retirement, student loan debt and lifestyle preferences — not to mention living through one or more financial crises — all factor in. Here are some key credit considerations for home buyers by generation.

Born roughly between 1997 and 2012, Gen Zers today are contemplating long-term financial decisions such as homeownership for the first time.

At the same time, many are reconsidering whether to invest in the same big-ticket items as previous generations, such as going to college or buying a car. While those bigger investments may not make sense for every individual, Gen Zers aren’t taking financial risks in their 20s compared with previous generations. As a result, they will need to find alternative ways to build their credit to secure an affordable mortgage loan down the line.

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If paid off regularly, credit cards and other unsecured lending options can help establish a credit history. Without a college or auto loan, a credit card might be the only item in an individual’s credit report. Credit mix, the variety of loans in a report, often accounts for 10 percent of overall credit score. By making on-time payments across multiple accounts, Gen Zers can show an ability to manage balances and credit lines — an important consideration by mortgage lenders.

But keep in mind that more secured credit does not mean more spending. A credit card is a tool — it isn’t a pass to live beyond your means.

Millennials (or Generation Y) were born roughly in the 1980s to the early 2000s. Between having more debt than previous generations at the same age and witnessing the 2008 financial crisis, they are renting longer and buying houses later.

For millennials who may be worried about a 2008 repeat given the pandemic’s economic impacts, it is important to follow a financial plan. A plan gives you something to turn to when things seem uncertain — like right now. If you’ve struggled to build credit due to competing financial investments and goals, the first step is to review your credit report and understand where gaps exist.

For instance, is your score low because you haven’t been able to make your student loan payments (the federal moratorium is extended through Aug. 31)? Or have you struggled to build credit because your largest monthly financial payment is rent and it’s not on your credit report? Increasingly, housing providers and credit reporting agencies are working together to see “expanded data” such as rental, utility and monthly streaming payments land on credit reports. Consider contacting your housing or utility provider to see if they can help report your payments to the national credit bureaus.

Born between the mid-1960s to the early 1980s, Gen Xers make up about 35 percent of the US workforce, and many are caregivers for children and older parents. As a result, this generation faces both new and old types of debt and may be weighing competing milestones and investments. This group also bore the weight of the 2008 financial crisis, hitting their prime earning years just as the economy was falling apart, impacting decisions about homeownership, child rearing and other key life moments.

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A Gen Xer might think that supporting their children’s college education will compromise retiring to their home — and location — of choice in a few years.

Taking out a tuition loan can strengthen — or hurt — your future mortgage application loan depending on whether you pay it back correctly. For many parents, the question is who is responsible for the loan? Is it in your name? Is it co-signed with your child or student? Are they prepared and committed to paying it back, or if they fall behind, are you prepared to absorb the impact?

Similar to Gen X, many baby boomers are also experiencing the “sandwich” effect. This means managing their own finances, taking care of a very elderly parent and often helping children or grandchildren with their financial and other needs. The pressure of aging parents will only increase since centenarians are the fastest-growing demographic in the country.

Born shortly after World War II and through 1964, baby boomers have lived much of their adulthood in a strong economy. Overall, this group is financially stable and has higher savings and spending ability compared with other generations, accounting for 70 percent of US disposable income.

While many baby boomers today have paid off their mortgage and car loans, they are also facing a changing income stream. With retirement, they may not be charging as much on credit cards — potentially lowering their credit scores. After a lifetime of paying bills on time, they could end up having a “thin” credit file. If needing credit in the future, it’s vital to create a financial plan now to maintain a high score.

For baby boomer retirees looking to downsize or buy a “dream home,” there are different types of loans and investments that could help. Baby boomers should think about using their savings to increase a down payment and then come up with a shorter-term mortgage to finance the rest of the home. If another home purchase is on the horizon, it’s important to speak with a tax and financial adviser to understand the capital gains and investment implications.

No matter your generation, the first step is regularly checking your credit report so you can understand the basis of your credit score. If there are accounts or loans bringing your score down, plan to remedy them. You can check your credit report for free weekly at annualcreditreport.com.

Francis Creighton is the president and CEO of the Consumer Data Industry Association (CDIA), based in Washington, DC

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