The credit score is a very vital number in the lives of consumers and may greatly influence the creditworthiness of individuals. Credit scores are central to the process through which a borrower is assessed for credit risk to determine the likelihood of granting credit. Consumers’ credit information is compiled into a report containing details of their credit history, payment behavior, outstanding balances, credit history age, kind of credit facilities that the consumer has used, and number of credit inquiries made in the past and condensed into three digits which shows how creditworthy a consumer is.
In the United States, FICO and VantageScore are the most popular types of credit score models. Both models assign consumers with scores ranging from 300 to 850 where every higher score represents lower perceived risk. Now, know what exactly is a good or average credit score?
Average Credit Score Today
In terms of FICO credit score, the average credit score in the United States as of 2022 is 716, based on data from Experian – one of the credit rating agencies in the United States. This is a 14-point improvement from the previous year where the average FICO score was at 702. FICO divides the score between 670 and 739 as Good and the scores that are 740 and above, are termed as Very Good.
The Credit Score analysis shows that it has an average value among generations.
That is why, at present baby boomers who are 56-75 years old use have the highest average FICO score of 751. On average, generation X ages 41-55 have an average score of 717. On the other hand, millennial’s credit score is significantly lower at 668 with this generation being aged between 25 – 40 years.
The average score also changes with the states and can be used to compare the two distributions. The states that are currently leading are Minnesota with an average FICO score of 718 while the lowest is from Mississippi with an average FICO score of 705. This made it quite clear that there are disparities between consumers of different geographical locations in terms of how they handle their credit.
While half of the consumers or 48 percent have credit scores categorized as Very Good, 13 percent have Poor credit scores. However, it implies that there is still much room for improvement in this case.
Why Credit Scores Matter
It is essential to note that credit scores play a role beyond whether or not a credit vendor will extend credit. Essentials like interest rates, credit limits, deposits on utilities, rental applications, insurance quotations, and even employment can be influenced significantly by numerical credit scores.
For instance, a borrower with a FICO score of 760 could expect to get 15 years fixed mortgage rate of 2. 5 percent while the same a borrower with a FICO score of 620 could expect to get 5 percent. Even with a nominal difference of 0. 375 percentage points, the higher interest rate costs $161,273 more than the lower rate over the life of the $250,000 mortgage.
Credit scores also point out to landlords how responsible a potential tenant will be, and to employers how responsible an applicant is financially.
It is very important to understand the factors that determine your credit score and how to improve it.
Fortunately, credit scores are not fixed means and they can be worked up and improved over time. They vary depending on the behaviors that you exhibit, at different times.
Here are four critical steps to improve your credit score:
- This one is simple: More consumers should review the credit reports from Equifax, Experian, and TransUnion to identify problems that are holding them back. Challenge any information that the agencies may have provided as incorrect.
- Ensure that all bills are paid on time each month. This section contributes 35 percent to the FICO score. This is a good idea: arranging the schedule of paying bills or receiving notifications.
- Ensure the ratio of credit used to total credit limits is kept below 30 percent. This measures the extent to which one is utilizing the credit they have been extended, and the lower the ratio the better.
- Do not take credit for products that involve a new line of credit. Hard inquiries that result from new credit applications can lower your score for some time. Far from it: it is good to apply for credit only when necessary.
Since the average FICO score today is well over 700, the consumer should understand that lenders will base their creditworthiness on their score as an individual and not on how well or poorly other borrowers perform. Some of the strategies that can be used to improve the credit score include frequently monitoring the credit report, challenging the credit report errors, avoiding high credit utilization, and paying the credit on time are measures that are bound to enhance the credit score in the long run.
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