Your credit score is more than just a number; it’s a crucial indicator of your financial health. It influences everything from loan interest rates to approval for rental properties and even job opportunities. Understanding the credit score average and where you stand in relation to it is the first step towards taking control of your financial future. This guide will provide a comprehensive overview of credit score averages, factors that influence them, and actionable steps you can take to improve your own score.
Understanding Credit Score Averages
What is a Credit Score?
A credit score is a three-digit number that summarizes your credit history. It’s used by lenders to assess the risk of lending you money. Several different credit scoring models exist, but the most widely used are FICO and VantageScore.
- FICO Score: Developed by Fair Isaac Corporation, FICO scores range from 300 to 850. It’s the most commonly used score by lenders.
- VantageScore: Developed by the three major credit bureaus (Equifax, Experian, and TransUnion), VantageScore also ranges from 300 to 850.
Both FICO and VantageScore use similar factors to calculate your score, but they weigh them differently. Understanding these factors is critical for improving your credit.
National Credit Score Average
According to Experian, the average FICO score in the United States in 2023 is around 714. This generally falls into the “Good” credit score range. However, it’s crucial to remember that this is just an average. Individual scores can vary significantly based on a variety of factors.
- Excellent Credit: 800-850
- Very Good Credit: 740-799
- Good Credit: 670-739
- Fair Credit: 580-669
- Poor Credit: 300-579
Knowing where you fall within these ranges can help you understand the types of financial products you’re likely to be approved for, and at what interest rates.
Why the Average Matters
While aiming for a score above the average is a good goal, the real importance lies in understanding how lenders view different score ranges. A score significantly below the average can limit your options and lead to higher interest rates.
- Better Interest Rates: Higher credit scores typically qualify you for lower interest rates on loans and credit cards.
- Greater Approval Odds: Lenders are more likely to approve your application with a higher score.
- Access to Financial Products: Some financial products, like premium credit cards, are only available to those with excellent credit.
- Lower Insurance Premiums: In some states, your credit score can affect your insurance premiums.
Factors Influencing Your Credit Score
Payment History
Your payment history is the most important factor in determining your credit score. It reflects whether you’ve paid your bills on time in the past.
- On-Time Payments: Consistently paying your bills on time is crucial for building a positive credit history.
- Late Payments: Late payments can negatively impact your score, even if it’s just by a few days. The more late payments you have, and the more recent they are, the greater the impact.
- Collections and Bankruptcies: Accounts sent to collections and bankruptcies can severely damage your credit score.
Example: Let’s say you have a credit card bill due on the 15th of each month. Paying it by the 15th (or even a few days before) consistently will build a positive payment history. Paying it after the 30th, however, is likely to be reported as a late payment and negatively impact your score.
Amounts Owed
The amount of debt you owe compared to your available credit, known as your credit utilization ratio, is another significant factor. It’s generally recommended to keep your credit utilization below 30%.
- Credit Utilization Ratio: This is calculated by dividing your total credit card balances by your total credit card limits.
Example: If you have a credit card with a $10,000 limit and a balance of $2,000, your credit utilization ratio is 20%.
- High Balances: Maxing out your credit cards can significantly lower your credit score, even if you make your payments on time.
- Low Balances: Keeping your balances low demonstrates responsible credit management.
Tip: Consider making multiple payments throughout the month to keep your balances low.
Length of Credit History
The length of your credit history also plays a role in your credit score. A longer credit history generally indicates a more predictable borrowing behavior.
- Older Accounts: The age of your oldest credit account is considered.
- Average Age of Accounts: The average age of all your credit accounts is also taken into account.
- Closing Accounts: Closing older accounts can shorten your credit history and potentially lower your score.
Example: Someone with a credit card opened 15 years ago will typically have a higher score (all other factors being equal) than someone with a credit card opened only 1 year ago.
Credit Mix
Having a mix of different types of credit accounts, such as credit cards, installment loans (e.g., auto loans, mortgages), and retail accounts, can positively impact your credit score.
- Types of Credit: Lenders like to see that you can manage different types of credit responsibly.
- Avoid Overdoing It: Don’t open accounts you don’t need just to improve your credit mix.
Example: A person with both a credit card they use responsibly and* a car loan they consistently pay on time is likely to have a better credit mix than someone who only has credit cards.
New Credit
Opening too many new credit accounts in a short period can lower your credit score, as it may indicate higher risk.
- Hard Inquiries: Applying for credit can trigger a “hard inquiry” on your credit report, which can slightly lower your score.
- Avoid Multiple Applications: Be selective when applying for new credit.
- Rate Shopping: When shopping for a mortgage or auto loan, multiple inquiries within a short period may be treated as a single inquiry.
Tip: Limit your credit applications and avoid applying for multiple credit cards at once.
Improving Your Credit Score
Checking Your Credit Report
The first step in improving your credit score is to check your credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion.
- AnnualCreditReport.com: You can get a free copy of your credit report from each bureau annually at AnnualCreditReport.com.
- Review for Errors: Look for any inaccuracies, such as incorrect account balances, late payments that were not actually late, or accounts that don’t belong to you.
- Dispute Errors: If you find any errors, dispute them with the credit bureau and the creditor.
Making Timely Payments
As payment history is the most important factor, making on-time payments is critical. Set up reminders or automatic payments to avoid missing due dates.
- Automatic Payments: Set up automatic payments from your bank account to ensure you never miss a payment.
- Payment Reminders: Use calendar reminders or budgeting apps to track your due dates.
Lowering Credit Utilization
Keeping your credit utilization low is another effective way to improve your credit score. Aim for below 30% utilization on each credit card.
- Pay Down Balances: Pay down your credit card balances as much as possible.
- Increase Credit Limits: If you can, request a credit limit increase from your credit card issuer. This will lower your credit utilization ratio, even if your spending stays the same.
Becoming an Authorized User
If you have limited or no credit history, becoming an authorized user on someone else’s credit card can help you build credit. Make sure the cardholder has a good payment history.
- Piggybacking: This allows you to benefit from the cardholder’s responsible credit management.
- Choose Wisely: Select a cardholder with a long credit history and a low credit utilization ratio.
Secured Credit Cards
If you have poor credit or no credit history, a secured credit card can be a good way to start building credit. You’ll need to deposit a security deposit that serves as your credit limit.
- Building Credit: Using the secured card responsibly and making on-time payments can help you establish a positive credit history.
- Graduating to Unsecured: After a period of responsible use, you may be able to graduate to an unsecured credit card.
Conclusion
Understanding the credit score average and the factors that influence your credit score is essential for managing your financial health. By checking your credit report regularly, making timely payments, lowering your credit utilization, and taking other proactive steps, you can improve your credit score and unlock better financial opportunities. Remember, building good credit is a marathon, not a sprint. Consistency and responsible financial habits are key to achieving your credit goals.
