Navigating the world of credit can feel like deciphering a secret code. One of the most important pieces of this code is your credit score – a three-digit number that lenders use to assess your creditworthiness. Understanding the average credit score, what it means, and how you can improve yours is crucial for achieving your financial goals, whether it’s buying a home, securing a loan, or getting approved for a credit card with favorable terms.
Understanding the Credit Score Average
What is a Credit Score?
A credit score is a numerical representation of your creditworthiness, based on your credit history. It helps lenders assess the risk of lending you money. The most commonly used credit scoring model is FICO (Fair Isaac Corporation), with scores ranging from 300 to 850. Other scoring models exist, but FICO is the industry standard.
What is a Good Credit Score?
Here’s a general breakdown of FICO score ranges and their corresponding ratings:
- Exceptional (800-850): Considered excellent and typically qualifies you for the best interest rates and terms.
- Very Good (740-799): Above average and still allows you to access favorable rates and terms.
- Good (670-739): Considered average and generally acceptable for most lending purposes. You will likely be approved for loans and credit cards, but may not receive the best interest rates.
- Fair (580-669): Below average and may make it difficult to get approved for loans or credit cards with favorable terms. Expect higher interest rates.
- Poor (300-579): Significantly below average and makes it very difficult to get approved for credit. You’ll likely need to improve your credit score significantly before applying for major loans.
The Current Credit Score Landscape
According to Experian, the national average FICO score in the United States is around 715. This falls within the “Good” range. However, it’s important to remember that this is just an average, and individual scores can vary significantly based on factors like age, location, and financial habits.
Example: A young adult just starting out with credit might have a lower score due to limited credit history, while someone with a long history of responsible credit use might have a much higher score.
Factors Influencing Your Credit Score
Payment History
Payment history is the most significant factor in determining your credit score. Making timely payments on all your debts is crucial. Even one late payment can negatively impact your score.
Actionable Takeaway: Set up automatic payments for all your bills to avoid missing due dates.
Amounts Owed
This refers to the total amount of debt you owe compared to your available credit. It’s often expressed as a credit utilization ratio – the percentage of your available credit that you’re using on each credit card. A low credit utilization ratio (ideally below 30%) is beneficial.
Example: If you have a credit card with a $1,000 limit and you owe $200, your credit utilization ratio is 20%. Keeping this below 30% ($300 in this example) is ideal.
Actionable Takeaway: Pay down your credit card balances as much as possible each month to keep your credit utilization low.
Length of Credit History
The longer your credit history, the better. Lenders like to see a track record of responsible credit management over time. This doesn’t mean you need to have had credit for decades to have a good score, but a longer history generally helps.
Credit Mix
Having a mix of different types of credit accounts (e.g., credit cards, installment loans, mortgages) can positively impact your credit score, demonstrating your ability to manage different types of debt responsibly.
New Credit
Opening too many new credit accounts in a short period can negatively affect your score, as it might indicate financial instability. Each application for credit also results in a “hard inquiry” on your credit report, which can slightly lower your score.
Actionable Takeaway: Avoid opening multiple new credit accounts simultaneously. Space out your applications and only apply for credit when you truly need it.
Improving Your Credit Score
Pay Bills on Time
This is the single most important thing you can do to improve your credit score. Set up reminders and automatic payments to ensure you never miss a due date.
Reduce Credit Card Balances
Aim to keep your credit utilization ratio below 30%. Pay down your balances aggressively to lower your debt and improve your score.
Check Your Credit Report Regularly
You are entitled to a free credit report from each of the three major credit bureaus (Equifax, Experian, and TransUnion) annually at AnnualCreditReport.com. Review your reports for any errors or inaccuracies and dispute them immediately.
Example: You might find an incorrect late payment reported or an account that doesn’t belong to you.
Consider a Secured Credit Card or Credit-Builder Loan
If you have a limited or poor credit history, a secured credit card (where you provide a cash deposit as collateral) or a credit-builder loan (designed specifically to help you build credit) can be effective tools to establish or rebuild your credit.
Become an Authorized User
If you have a trusted friend or family member with a credit card and a good credit history, ask if you can become an authorized user on their account. Their positive credit history will then be reflected on your credit report.
Common Credit Score Myths
Checking Your Credit Score Will Hurt It
This is a common misconception. Checking your own credit score results in a “soft inquiry,” which does not affect your score. Only “hard inquiries,” which occur when you apply for credit, can slightly lower your score.
Closing Credit Card Accounts Improves Your Score
Closing credit card accounts, especially older ones, can actually hurt your credit score by reducing your overall available credit and increasing your credit utilization ratio. It’s generally better to keep accounts open, even if you don’t use them frequently, as long as there are no annual fees.
All Credit Scores Are the Same
While FICO is the most widely used scoring model, there are other credit scoring models. The scores generated by these different models may vary slightly.
Conclusion
Understanding the average credit score and the factors that influence it is essential for managing your financial health. By paying bills on time, keeping credit utilization low, regularly checking your credit report, and avoiding common credit score myths, you can take control of your credit and improve your score over time. A good credit score opens doors to better interest rates, loan terms, and financial opportunities, empowering you to achieve your financial goals.
