What is the first thing that comes to mind when you think about financial health? For many, it’s their credit score – a three-digit number that acts as a financial report card. Understanding the credit score average is crucial, as it provides a benchmark for assessing your own creditworthiness and highlights areas for improvement. Whether you’re planning to apply for a loan, rent an apartment, or even get a new cell phone plan, your credit score plays a significant role. This article dives deep into credit score averages, the factors that influence them, and actionable steps you can take to improve your score.
Understanding Credit Score Ranges and Averages
Defining a Credit Score
A credit score is a numerical representation of your creditworthiness, based on your credit history. It’s designed to predict the likelihood that you’ll repay your debts on time. In the United States, the most commonly used credit scoring models are FICO and VantageScore. Both range from 300 to 850, with higher scores indicating a lower risk to lenders.
- FICO Score: The most widely used credit score, used by 90% of top lenders.
- VantageScore: A competing model that is also widely used and considers similar factors.
Credit Score Ranges and Their Meaning
Understanding the different score ranges helps you gauge your creditworthiness and eligibility for loans and credit cards. Here’s a breakdown:
- Exceptional (800-850): You’re considered an extremely low-risk borrower and will likely qualify for the best interest rates and terms.
- Very Good (740-799): Still considered a reliable borrower with access to favorable loan terms.
- Good (670-739): Considered an average borrower, likely to be approved for loans and credit, but might not get the best rates.
- Fair (580-669): Considered a subprime borrower, and you might face higher interest rates or difficulty getting approved.
- Poor (300-579): Considered a high-risk borrower, likely to face significant challenges obtaining credit.
The Current National Credit Score Average
The national average FICO score in the United States is around 714. While this is considered a “good” credit score, it’s important to remember that this is just an average. Your own credit score may be higher or lower, and understanding the factors influencing credit scores is key to improving yours. This average fluctuates slightly year-to-year.
Factors Influencing Your Credit Score
Payment History
Your payment history, which accounts for 35% of your FICO score, is the single most important factor. It reflects your ability to consistently pay your bills on time.
- Impact: Late payments, even by a few days, can negatively affect your credit score. The more recent and more frequent the late payments, the more significant the impact.
- Example: A single 30-day late payment can drop your score by dozens of points, especially if you already have a thin credit file.
- Tip: Set up automatic payments or calendar reminders to ensure timely payments.
Amounts Owed (Credit Utilization)
This factor, accounting for 30% of your FICO score, measures the amount of credit you’re using compared to your total available credit. It’s also known as credit utilization.
- Impact: High credit utilization signals that you’re overly reliant on credit, which lenders view as risky.
- Example: Maxing out your credit cards can significantly lower your credit score.
- Ideal Utilization: Aim to keep your credit utilization below 30% on each card and overall. Ideally, aim for below 10%.
Length of Credit History
The length of your credit history, accounting for 15% of your FICO score, reflects how long you’ve been using credit. A longer credit history allows lenders to better assess your repayment behavior.
- Impact: A longer credit history typically results in a higher credit score.
- Tip: Avoid closing old credit card accounts, even if you don’t use them frequently, as they contribute to your credit history length. (However, if they have high annual fees, consider if the benefit outweighs the cost)
New Credit
Opening multiple new credit accounts in a short period, which accounts for 10% of your FICO score, can negatively affect your score.
- Impact: Each credit application triggers a hard inquiry, which can slightly lower your score. Opening multiple accounts may also suggest you’re taking on too much debt.
- Tip: Space out your credit applications and only apply for credit when necessary.
Credit Mix
Having a mix of different credit accounts, such as credit cards, installment loans (e.g., auto loans, mortgages), and retail accounts, which accounts for 10% of your FICO score, can positively influence your score.
- Impact: Demonstrates that you can manage different types of credit responsibly.
- Tip: Don’t open credit accounts just to diversify your credit mix. Focus on managing your existing credit responsibly.
Improving Your Credit Score
Strategies for Building Credit
If you have a limited or no credit history, there are several strategies to build credit:
- Secured Credit Card: Requires a cash deposit that serves as your credit limit. Use it responsibly and pay your bills on time to build credit.
- Credit-Builder Loan: A small loan specifically designed to help you build credit. The funds are held in an account until you’ve made all the payments.
- Become an Authorized User: Ask a friend or family member with a good credit history to add you as an authorized user on their credit card.
- Report Rent and Utility Payments: Some credit reporting agencies allow you to report your rent and utility payments, which can help build your credit history.
Correcting Errors on Your Credit Report
Regularly reviewing your credit reports and correcting any errors is essential for maintaining a healthy credit score.
- Obtain Your Credit Reports: You can obtain free copies of your credit reports from each of the three major credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
- Dispute Errors: If you find any errors, such as incorrect account balances or late payments, dispute them with the credit bureau and the creditor.
- Documentation: Provide supporting documentation to support your dispute.
Responsible Credit Management
Practicing responsible credit management habits is key to maintaining a good credit score over time.
- Pay Bills on Time: Always pay your bills on time, every time.
- Keep Credit Utilization Low: Keep your credit utilization below 30% on each card and overall.
- Avoid Maxing Out Credit Cards: Maxing out your credit cards can significantly lower your credit score.
- Monitor Your Credit Reports Regularly: Check your credit reports regularly for errors and signs of fraud.
Understanding Credit Score Myths
Myth: Checking Your Own Credit Score Hurts It
Checking your own credit score does not hurt your credit score. These are considered “soft inquiries” and do not affect your score.
Myth: Closing Credit Cards Improves Your Score
Closing credit cards, especially older ones, can actually lower your credit score by reducing your available credit and shortening your credit history.
Myth: All Debt is Bad
Not all debt is bad. Responsible use of credit, such as paying off credit cards on time and managing installment loans effectively, can help build a positive credit history and improve your credit score.
Myth: Credit Scores Don’t Matter After Retirement
Credit scores still matter after retirement. They can affect your ability to rent an apartment, obtain insurance, or even get the best deals on services.
Conclusion
Understanding the credit score average is just the beginning. Maintaining a healthy credit score requires consistent effort and responsible financial habits. By understanding the factors that influence your score, building credit wisely, correcting errors on your credit report, and practicing responsible credit management, you can improve your creditworthiness and unlock financial opportunities. Regularly monitoring your credit score and credit reports allows you to stay informed and take proactive steps to protect your financial well-being. Remember, a good credit score is not just a number; it’s a key to a more secure and prosperous financial future.
