Credit Score Basics
If you’ve ever attempted to purchase a big-ticket item, such as a house or a car, the financing company likely spoke to you about your credit score. But what exactly is a credit score? Simply put, your credit score is a statistical number that is based on your credit history, i.e., your number of open accounts, levels of debt, and repayment history. Your credit score evaluates your creditworthiness, so lenders use this as a way to assess the probability that you will repay your loan in a timely manner. Therefore, this is one of the most defining factors lenders take into consideration to determine whether or not to give you a loan.
Credit card companies, insurance companies, and lenders all use credit scores to determine loan amounts and interest rates. Since your credit score is based on your credit history, it can have a huge effect on just how much you end up paying.
What is the Average Credit Score?
Answering this question may be difficult, as every expert, credit bureau, and loan officer has a varying opinion on what the threshold between good credit and poor credit is. A credit score that is considered bad by one agency may be deemed acceptable by another.
So let’s take a look at the numbers:
Credit scores range from 300 to 850. Generally, a score of 670 or above is considered a good credit score, while any score above 740 is considered excellent. The first credit score model was created in 1998 by the Fair Isaac Corporation and is known as the FICO score. The FICO score is used by financial institutions and is by far the most commonly used system of scoring. Typically, using these ranges will give you a pretty good idea of where you stand.
- Excellent: 800 to 850
- Very Good: 740 to 799
- Good: 670 to 739
- Fair: 580 to 669
- Poor: 300 to 579
While every creditor will still define its own ranges for credit scores, using the average FICO score range will allow you to gauge where your credit score sits in the eyes of lenders. Furthermore, you can compare your score to national averages. According to FICO, the following proportions of consumers have scores in the following ranges:
|Average Credit Score in the U.S.||% of U.S. Population|
|Up to 499||5.8%|
Based on this information, more than 50% of the population has a credit score over 700, with 42% scoring below that level.
However, FICO is not the only scoring model used in the credit industry. The other main scoring model used is called VantageScore® which is now on its third version– VantageScore 3.0.
What Affects a Credit Score?
While every credit scoring model is different, there are a number of common factors that affect your score. These factors include:
- Payment history
- Using your credit limits
- Balances on your active credit
- Credit inquiries
- Available credit
- Number of accounts
Each factor has its own value in a credit score. If you want to keep your number at the higher end of the credit score scale, it’s important to stay on top of paying your bills, using your approved credit, and limiting inquiries.
However, if you are in the market to purchase a house or loan, there is an annual 45-day grace period in which all credit inquiries are considered one cumulative inquiry. In other words, if you go to two or three lenders within a 45-day period to find the best rate and terms available for a loan, this only counts as one inquiry. This means that they are not all counted against you and will not affect your credit score.
Why is Your Credit Score Low?
Lower credit scores aren’t always the result of late payments, bankruptcy, or other negative notations on a consumer’s credit file. Having little to no credit history can also result in a low score.
This can happen even if you had established credit in the past – if your credit report shows no activity for a long stretch of time, items may ‘fall off’ your report. Credit scores must have some type of activity as noted by a creditor within the past six months. If a creditor stops updating an old account that you don’t use, it will disappear from your credit report and leave FICO and or VantageScore with too little information to calculate a score.
Similarly, consumers new to credit must be aware that they will have no established credit history for FICO or VantageScore to appraise, resulting in a low score. Despite not making any mistakes, you are still considered a risky borrower because the credit bureaus don’t know enough about you.
How to Improve Your Credit Score:
If you are unsatisfied with your credit score and want to increase it, there are always methods to help you achieve this. Here is a list of things you can do to improve your credit score:
- Cleaning up your credit report
- Paying down your balance
- Paying twice a month
- Increasing your credit limit
- Opening a new account
- Negotiating outstanding balance
- Making payments on time
Credit.org offers consumers help in managing multiple payments. With a Debt Management Plan, you have the possibility of joining these payments into one lump sum with a lower interest rate. Learn more by reaching out to one of our credit coaches today!
Credit Score Range
What is a Bad Credit Score?
Bad credit score = 300 – 549: It is generally accepted that credit scores below 550 are going to result in a rejection of credit every time. If your score has fallen into this range, improving your score is going to take some work.
Filing for bankruptcy can bring a score down to this level. Statistically, borrowers with scores this low are delinquent approximately 75% of the time. But if you continue to make your payments on time, your score should improve. There are certain types of loans, like home loans, that are hard to get with a score in this range, but there are still options for getting a mortgage with bad credit.
What is a Poor Credit Score?
Poor credit score = 550 – 619: Credit agencies consider consumers with credit delinquencies, account rejections, and little credit history as subprime borrowers due to their high credit risk. Although it is possible to qualify for credit, it is often at very disadvantageous terms you will pay much higher interest rates and penalty fees.
If you find yourself in this range, you should begin to address any specific credit problems you have to try to boost your score before applying for credit. Subprime borrowers typically become delinquent 50% of the time.
What is a Fair Credit Score?
Fair credit score = 620- 679: Individuals with scores over 620 are considered less risky and are even more likely to be approved for credit.
In the mid-600s range, consumers become prime borrowers. This means they may qualify for higher loan amounts, higher credit limits, lower down payments and better negotiating power with loan and credit card terms. Only 15-30% of borrowers in this range become delinquent.
What is a Good Credit Score?
Good credit score = 680 – 739: Credit scores around 700 are considered the threshold to “good” credit. Lenders are comfortable with this FICO score range, and the decision to extend credit is much easier. Borrowers in this range will almost always be approved for a loan and will be offered lower interest rates. If you have a 680 credit score and it’s moving up, you’re definitely on the right track.
According to FICO, the median credit score in the U.S. is in this range, at 723. Borrowers with this “good” credit score are only delinquent 5% of the time.
What is an Excellent Credit Score?
Excellent credit score = 740 – 850: Anything in the mid 700’s and higher is considered excellent credit and will be greeted by easy credit approvals and the very best interest rates. Consumers with excellent credit scores have a delinquency rate of approximately 2%.
In this high-end of credit scoring, extra points don’t improve your loan terms much. Most lenders would consider a credit score of 760 the same as 800. However, having a higher score can serve as a buffer if negative occurrences in your report. For example, if you max out a credit card (resulting in a 30-50 point reduction), the resulting damage won’t push you down into a lower tier.
Different lenders have different standards and your experience may vary. You may have a high credit score, but a negative public record on your credit file may hurt your chances of getting a loan. And while credit scores don’t take your income into account, lenders will. No matter how good your credit score, a lender will not approve you if they feel there are risks, such as your inability to repay.
No matter where you land on the scale, always remember that there are a number of factors that can both harm your credit history and help you improve your score. If you’re struggling with overcoming credit card debt, reach out to one of our trained credit coaches to help. We’ll assist you in paying off your debt faster and teach you how to improve your personal financial situation.