Everything You Need To Know About Your Credit Score

Everything About Credit Score

A credit score definition would consist of a numerical expression that is based on an analysis of a person’s credit files. This score is designed to represent the creditworthiness of an individual. A credit score is based primarily on a credit report that is obtained from credit bureaus.

Lenders including credit card companies and banks use a credit score in order to evaluate the type of risk that is posed to them for lending money to a consumer. They also consider ways to mitigate losses over bad debt. The lenders will use a credit score in order to determine who will qualify for a loan as well as the interest rate that will be given for the loan.

In addition, credit scores are used to help lenders determine credit limits.

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Credit Score

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Lenders also consider what types of customers are going to bring them the most profit. The use of identity or credit scoring before authorizing or granting credit is the implementation of a system that is trusted and that has been in place for many years.

Credit Score is Important to Lenders

Credit scores are not just limited to banks. There are other organizations such as landlords, insurance companies, government departments, and mobile phone companies that use the same techniques. These companies use a credit score to determine whether or not they will provide people with a contract or policy.

Data mining also uses similar techniques regarding the use of credit scoring.

  • Landlords
  • Insurance Companies
  • Government Departments
  • Mobile Phone Companies

There are three main credit bureaus that are used by credit card companies and other lenders. These three credit bureaus are Equifax, Transunion, and Experian. These are the companies that keep track of your credit history, including any late payments that you make or any delinquent accounts that you may have. These credit reports generated by these three companies are what are used to determine someone’s credit score.

What Is A Good Credit Score?

Having a good credit score should be something that everyone aspires to. As mentioned, a good credit score is what will determine whether or not you will be able to borrow money. In addition, the better your score, the more likely you are to get a lower interest rate as well.

Being able to get a loan or credit at a good interest rate is extremely important as you are trying to make big purchases such as a vehicle or a home.

With this being said, trying to determine what number your credit score needs to be in order to be considered good” can become tricky. There are several schools of thought when it comes to figuring out how to make a good credit score.

With that being said, keeping a low debt to credit ratio and paying your bills on time are both extremely important when it comes to your credit score.

Most credit scores including the FICO credit score as well as the latest version of VantageScore use a range from 301 to 850. Within that range of credit scores there are different categories going from excellent to bad.

Chart of Credit Scores

While this list is considered to be a good indicator of what lenders consider bad to good credit, these numbers are not set in stone. This is because lenders each have their own definition of what they consider to be a good credit score.

For example, one lender that wants to approve more borrowers may approve applicants that have a score of 680 or higher. Another lender may be a bit more selective and only approve applicants that have scores of 750 and above.

Other lenders may offer credit to anyone that has a score of at least 650, but charge a higher interest rate to consumers that have a credit score of below 700.

When it comes to borrowing money, choosing the right lender is important. Make sure that when searching for a credit card or a loan that you shop around in order to find a creditor that best matches your current needs.

What Is The Highest Credit Score?

Credit Score Ratings

The highest credit score varies based on the credit score range. Each lender is provided with a list of different credit scores from which to choose. There are several reasons why the credit score range is important. The main reason is because when you learn your credit score you need to know the range that you are looking at in order to best understand where your credit score number fits in.

There are several scoring models used to determine the credit score range. These models include:

CREDIT SCORING MODELS

  • FICO Credit Score Range: 300 to 850
  • VantageScore 3.0 Credit Score Range: 300 to 850
  • ​VantageScore scale versions 1.0 and 2.0 credit score range: 501 to 990
  • ​PLUS Credit Score Range: 330 to 830
  • ​TransRisk Credit Score Range: 100 to 900
  • Equifax Credit Score Range: 280 to 850

With each of the scores that are listed, the higher the number of the credit score is equal to a lower risk. This means that consumers that have a higher credit score are more likely to be approved for credit and when they are approved they also will receive the best interest rates.

In addition, consumers who have high credit scores are more likely to receive discounts on insurance.

Credit Scores by Fico

The differences in the credit score ranges affect what is considered to be a high score as it depends on which type of scoring is used by the lender. For example, if you have an 840 FICO score you are just 10 points away from having the highest possible score, which makes your credit considered as super prime.

However, if you have the same score of 840 on the version 2.0 of VantageScore, you will be 150 points away from the highest score, which is not as great. As you can see, it will directly depend on which credit score a lender is using when determining your creditworthiness for a loan or line of credit.

What Is The Average Credit Score?

In the United States the average FICO score is 695. The average VantageScore is currently 671. Currently, these are the two most widely used credit scoring systems used in the United States. Each of the models have credit score ranges from 300 to 850, with the higher the score the better.

695 Average FICO Score

The current average score of 695 is an all time high. Even with the different scoring models that exist, which may cause the number to fluctuate by several points, most scores fall between the range of 660 to 720. These numbers coincide with what is considered to be a “prime” credit score according to the Consumer Financial Protection Bureau.

14%
Credit Invisibles

There is roughly 14 percent of the population does not have any type of credit and these individuals are labeled as being credit invisible. As a result of having no credit, these individuals will have a difficult time getting new lines of credit should they so desire. Having no credit is almost, if not worse than having bad credit.

The reason for this is because not having any credit does not allow a creditor the ability to see what type of risk you pose as a borrower.

While the average credit score has been improving overall, there was a slight dip in scores during the years 2009 and 2010 when the recession occurred. During this time there was a large group of people who claimed bankruptcy or defaulted on loans, which would have caused their credit scores to go down. This in turn would affect the average credit score of the country.

Average US Credit Score

The economic diversity throughout the United States means that the average credit score varies greatly based on age, different populations, and income levels.

Age And The Average Credit Score

When looking at the average credit score, one of the biggest differences is seen among the different age groups. Typically, FICO scores tend to improve with age. One anomoly to this is that people age 30 to 39 have the largest number of individuals with credit scores at the sub to 620 range.

This trend goes along with the financial situation that many people in their 30s face. It is typically around this time when major life expenses and debt tend to add up, first mortgages, weddings, etc. One study of American credit card habits showed that people in this age group also have some of the largest amounts of credit card debt.

Age Chart

Another age group that has an average credit score that is lower is those who are below the age of 30. One reason for this could be the limited amount of access this age group has to credit. After the CARD act was passed in 2009, it became much harder for those aged 18 to 21 to obtain a new credit card account.

As a result of this many young adults do not build up a credit file until they are a bit older. This drives the average credit score down.

Once individuals hit their late 40s most will have a good to excellent FICO credit score. The credit score average continues to improve with age.

Income And The Average Credit Score

The amount of a person’s income generally affects their credit score. People who have higher incomes tend to have higher average credit scores. Debt to credit ratio has an indirect role in determining an individual’s credit score.

One factor that is used by organizations such as FICO when considering a person’s credit risk is the person’s credit utilization. Credit utilization refers to the percentage of total available credit someone uses each month.

Typically, companies such as FICO are looking for a credit utilization of below 30% in order to raise their credit score. Typically, if a person has a lower income they may rely on their credit cards more, leading to a higher credit utilization and thus lowering their credit scores.

Median Income Average Credit Score

Another way that income could play into credit utilization and ultimately affect a person’s credit score is by determining the credit limit. Credit lenders look at a consumer’s income when they decide how much revolving credit to provide. The lower a person’s income, the more likely it is that they will receive a lower credit limit.

This means that people who have lower incomes will have lower credit limits, which makes it easier for these individuals to eat up a large portion of what they have available, which in turn increases their credit utilization.

Average Credit Scores Of Home Buyers

Typically, the average credit score of a homebuyer is around 728. This is higher than the national average credit score. Of the over 85,000 mortgage applicants that were surveyed by the Federal Reserve, there were only 6.8 percent who had credit scores of under 620.

In the year 2010, the United States Federal Reserve Bank created a report based on credit circumstances of home borrowers. The data from the report broke down the average credit scores based on minority status. Every group except for black consumers had credit scores that averaged over 700.

Borrowers of the Asian decent tended to have higher than average scores with their average being a 745 on the FICO scale.

Home Buyers Credit Score

Average Credit Scores Throughout The Different States

Generally speaking, when considering the lowest scores throughout the United States, most can be found in the southern states including Mississippi, Louisiana, Arkansas, and Alabama.

While credit utilization throughout these states is somewhat low, there have been recent studies that have shown these regions have the lowest percent of the population with open credit cards or home equity lines of credit.

Since the year 2005, there has been a decline in open credit lines throughout the United States. This is because of the recession. While many other states have started to recover, these southern states are still showing lower numbers.

2008 Recession

While southern states have suffered, there have been states such as North Dakota and Minnesota that have been resilient despite an economic turndown. The average scores in those states remain above 700.

The current standings shows a snapshot of a community’s credit score and because of this it is more revealing to look at a trajectory of credit scores. When looking at the trajectory of scores based on the states, it seems that the same states that are underperforming as a whole are underperforming nationally as well.

For example, South Carolina had 20 percent of the population reported as having weak or struggling credit situations and Mississippi was a close second at 19 percent. This means that this percentage of individuals have credit bills that are sixty or more days overdue.

How To Check Credit Score

After learning about how important your credit score is, chances are you are wondering, how do I check my credit score? The answer to this question is that there are several ways that you can get your credit score. This includes getting it from a credit card statement or other type of loan statement.

You can also retrieve your credit score from a non-profit counselor or get it from a credit reporting agency for a set fee.

As mentioned, you actually have more than a single credit score. These credit scores are calculated based on information provided by your credit reports. If the information about your credit history is different in the credit reports obtained from the three major consumer reporting agencies, your credit score from each of these agencies will be different.

In addition, lenders use credit scores that are slightly different based on the type of loans that are being applied for.

Four Ways To Get Your Credit Score

There are many large credit card companies as well as some auto loan companies that have started to provide credit scores to each of their customers every month. The score is typically listed on your monthly statement. You can also find it by logging into your online account.

Check Your Loan Statement Or Credit Card Statement

Credit Card Statement

Non-Profit Counselors

Another way to find out your credit score is to speak with a non-profit counselor. There are both non-profit credit counselors as well as HUD approved housing counselors who can provide you with a free credit report as well as your score and then go over them with you to help you improve your score as necessary.

Credit Score Services

There are several websites and services that advertise a free credit score. There are some of these sites that get their funding through advertising and for this they do not charge a fee. There are other sites that may require that you sign up for a credit monitoring service. This monthly service typically comes with a fee that you will have to pay in order to get your “free” score.

Find Out Your Credit Score

When choosing a credit score service typically you will be provided with a free trial. If you do not cancel the service within a set amount of time, typically as short as a week, you will end up paying the monthly fee. Make sure that you read the fine print and know what you are signing up for and how much it really costs.

Purchase Your Score

Another option is to purchase your credit score directly from one of the credit reporting companies. You can purchase your FICO credit score from myfico.com. There are other services that may offer your credit score for purchase as well.

If you purchase your credit score directly you will not be required to purchase identity theft monitoring, credit protection, or other services that could be offered at the same time.

Credit Score By Fico

There are some credit score services that will provide you with an “educational’ credit score. This score is not one that a lender would actually use. However, these scores are typically close to the scores that lenders may use and can be helpful for some individuals. For other individuals these educational scores are quite different.

A report published by CFPB found that there were meaningful differences found for about one out of every four individuals. For this reason, it is important when choosing where to obtain your credit score that you know what kind of score that you will be getting.

Reviewing Your Credit Reports

It is important to always get and review your credit reports. You can obtain one free report per year from each of the credit reporting agencies at www.annualcreditreport.com. These reports are what your credit score is based on. This means that if there are mistakes in your credit report it could adversely affect your credit score.

After you pull your credit report you may be wondering what you should look for. When pulling your free credit reports each year you can either pull them all at once or you can choose to pull them one at a time.

Credit Report Reading

Many financial advisors recommend that you pull one credit report every four months. The reasoning behind this is that it allows you to regularly track your records. Either way, making sure to check your credit reports is smart as it is the only way to ensure that the information being reported to credit agencies is accurate and to ensure that your credit score reflects the information accurately.

Once you have retained your report there are certain things that you should look for. Here are some things that can provide you with a quick x-ray of your current credit health.

Delinquencies

One of the biggest influences on your credit score are delinquencies. In fact, roughly 35 percent of your FICO score is made up of delinquencies. If you see any notations on your credit report that state bills have been paid from 30 to 120 days late, this is damaging your credit score.

The timeline is important as well. The later that the payment is the more it will hurt your credit. Additionally, if it has been a long time since you have made a payment late, it will affect your credit less.

Credit Utilization

As mentioned above, your credit utilization is also important to your credit score. Credit scoring formulas not only look at the amount of room that you have on your current credit cards, but they also calculate the total of your debts on revolving accounts with the credit lines of the same accounts.

For example, if you have 4 credit cards that each have a $5000 limit or a total of $20,000 in credit and you have a balance of $1000 on two of the cards and nothing on the other 2 your debt is $2000, which is ten percent. This is an ideal situation as you want to keep your ratios below ten percent.

Utilization Rate

While ten percent is a lofty goal, keeping your credit utilization under forty percent is definitely recommended. Running up a $3000 balance on a card that only has a $5000 limit or running up balances across several cards is worse.

Collection Accounts

If you have any accounts that have gone to collections or that have been written of as bad debt you need to review them. There may be some instances such as a time when you moved and a collection agency did not find you for a utility bill and it is now on your report. There are also cases that pop up where collections pop up on your report that are not actually yours.

If you find any information that is not related to your personal credit history you can dispute the items and have them removed. If the collection accounts are yours you can chose to pay it if you can afford to. Before making a payment you should check the statute of limitations for your state. This is the amount of time that a creditor has to sue you over specific types of debt.

Separate from this time limit any item can stay on your credit report for seven years. The longer the item has been on the report the less it will affect your score.

Inquiries

Your credit report will also provide you with information about who has been looking at your report. There are two types of inquiries found on your report.

Hard And Soft Inquiry

A hard inquiry occurs when you request new credit. This is when you fill out an application, sign the paperwork, etc. and have asked the lender to check your credit history. When a hard inquiry occurs your credit score may go down a bit. A hard inquiry can affect your score for a year, but you will see these inquiries on your credit report for two years.

A soft inquiry is what a credit bureau puts on a credit report when someone reviews your file when you have not asked for new credit. For example, if you pull your own credit report that will be a soft inquiry. You will also see a soft inquiry if a prospective lender pulls your report for marketing reasons. A soft inquiry will not affect your credit score.

Looking over both the hard and soft inquiries on your credit report is a good way to know who is looking at and possibly using your credit information.

How To Improve Credit Score

When it comes to how to improve credit score there are several steps that you can take. One thing to remember is that when it comes to improving your score you can look at it like trying to lose weight. It will take time and effort and many of the quick fix efforts are likely going to backfire.

Make sure that you are wary of any claims that you can improve your credit score quickly. The best advice when it comes to how to increase credit score is to manage your credit responsibly over time.

Here are some tips on how to fix credit score.

Go Over Your Credit Report

As mentioned above, you should check your credit report. When it comes to improving your credit score, checking your report is the first place that you will need to start. You cannot start fixing your credit score if you do not know what is showing on your credit report. As mentioned your credit report is full of information and data that is used to calculate your score.

There are many people who find errors when they actually go over their credit reports.

It is important to make sure that your report is accurate and that the amount that is owed on each of your accounts is actually correct. If you find any type of error on your report, make sure to open a dispute to get the errors removed.

Payment Reminders

Making your payments to your creditors on time is one of the biggest factors when it comes to your credit score. There are some banks and credit card companies that provide payment reminders through their online banking systems. These reminders can be sent through email or text and provide a great way to keep track of when each of your bills are due.

Pay Your Bills

Another option is to enroll in an automatic payment system offered by most loan and credit card providers. This will automatically debit your payment from your bank account at the same time each month. However, this will typically only make a minimum payment, so it will not help with money management skills.

Reducing Debt

Reducing debt is often easier said than done. However, reducing the amount of money that you owe is going to be a more satisfying achievement than even improving your credit score.

The first step to reducing your debt will be to stop using your credit cards. Look over your credit report and make a list of each of your accounts and how much you owe on each of them. Also note the interest rate that you are being charged for each of the accounts.

Reduce Your Debt

Next, come up with a payment plan that will put most of your budget available for debt payments towards the cards with the highest interest rates first and maintain minimum payments on the other accounts. Once you have your highest interest cards paid off, move on to the next one.

Other Tips For Fixing Your Credit Score

Payment history contributes to 35% of a FICO credit score, which shows how significant this category is on your credit score. With that being said, past issues such as late or missed payments are not something that can easily be fixed. To avoid these negative effects take the following steps:

  • Make sure to pay bills on time
  • If you have missed any payments make sure that you get current and keep current
Accounting
  • The longer that you make on time payments after making a late payment, the more your credit score should increase. Older credit issues count for less, so poor credit performances do not haunt you forever. As time passes and a pattern of good payment patterns start to show up on your credit report. When credit scores are calculated credit issues are weighed against positive information, which says you are managing your credit better.
  • t is important to note that paying off collection accounts does not remove it from your credit report.
  • Collection accounts stay on your credit report for seven years

If you are having difficulty making ends meet, consider contacting your creditors or talking to a legitimate credit counselor about what you can do.

These things will not rebuild your credit score immediately, but if you start to manage your current credit situation and make your payments on time, you should see an improvement in your score over time. Seeking help from a credit counseling service is not going to hurt your score.

Tips For The Amounts You Owe

The amounts that you owe your creditors contribute 30% to your credit score calculation. This area of your credit is often easier to clean up than your payment history, but it will require that you are disciplined financially.

Make sure that you keep your balances on your credit cards and other revolving credit accounts low as a high outstanding debt can negatively affect your credit score.

Instead of moving your debt around, pay it off as quickly as you can. Paying down your revolving debt is the most effective way to improve your score in this area. In fact, owing the same amount of money, but having fewer accounts open can actually lower your score.

Always Try To Pay Your Debts

If you have a card that you do not use, do not close it. These unused cards can actually help raise your score as you will have a higher credit to debt ratio. However, it is not a good idea to open new credit cards that you do not actually need in order to increase the amount of your available credit as this could actually cause your credit score to go down.

Credit History

The amount of time that you have had credit also affects your score. If you have only been managing credit for a short amount of time, do not open several new accounts too quickly. Opening new accounts will lower the average age of your accounts and this can have a large effect on your scores if you do not currently have a lot of other credit information. Additionally, opening up several new accounts can seem risky if you are new at using credit.

TIPS FOR NEW CREDIT

  • Shop for rates for a specific loan in a set amount of time
  • If you have had issues, re-establish your credit history
  • Open new accounts responsibly
  • Request and check your credit report
  • Open new credit card accounts only as you need to
money back guarantee under question
  • Do not open an account just to create a better mix of credit as this will likely not help your score
  • Closing an account will not make it go away
  • Closed accounts show up on your credit report and could be considered with a score

When it comes to how to fix your credit score it is important to note that fixing any errors in your credit history if there are any is the first step. Next, it is important to follow the above guidelines in order to maintain a credit history that is consistent. Raising your credit score after a poor mark is made on your credit report or building your credit for the first time is going to take time, patience, and discipline.

Conclusion

Almost everyone knows the importance of their credit score. The problem lies with the fact that many people do not understand how their credit score is obtained and what they can do to improve their credit score if it is in the fair to poor range.

A credit score is what is used by lenders to determine your credibility as a consumer. When starting out it can be difficult to obtain credit as lenders do not have a way of assessing your risk. However, once you have obtained your first credit card or small loan, making on time payments is the best possible thing that you can do.

Once you have built up your credibility, it will be easier to obtain the credit that you need to make the purchases that you need to.

When it comes down to the factors that affect your credit score, the amount of debt that you have combined with your payment history are two of the biggest factors that are going to affect your credit score.

In order to obtain and keep a high credit score, make all of your payments on time. Even if you can only make a minimum payment on a credit card account for a certain time, these small payments when made on time will help boost your score.

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