Understanding the Average Credit Score:
What it means for your
financial outlook
Written by: Martina Hargrove
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Credit Bureaus Determine Average Credit Score
An average credit score is determined by credit bureaus using a mathematical process that involves a number of criteria, such as credit history, that are set in place to gauge one's credit worthiness. Although this practice was developed in the 1950s, it has only come to the forefront of the financial world in the last few decades.
The FICO score, named for the Fair, Isaacs Company, who joined forces with the three major credit bureaus to devise the scoring system in the 1980s, ranges from a low of 300 to a high of 850, the perfect score.
Average U.S. FICO Score is 720
Having at least an average credit score increases the chances that you'll be approved for a loan, such as a mortgage, or car loan, and also receive better interest rates. The average credit score in the United States is now at roughly 720 points. Those borrowers who are below the 620 mark should expect to pay higher interest rates, while those over 760 will enjoy premium rates on loans and credit.
How is Your Average Score Calculated
To determine one's average credit score, the three most often used credit bureaus, Equifax, Experian, and Trans Union, use several bits of information, including:
- Outstanding debts: The number of outstanding debts, and the ratio of one's total balances to total credit limits.
- Type of credit: The amount and type of credit currently used, such as department store cards, bank cards, and loans.
- Personal payment history: The number of late payments made, when and how often, as well as any notations regarding bankruptcies, accounts sent to collections, or accounts that have been written off by the creditor.
- New credit: The number of new credit inquiries and new lines of credit established, how often, and how recent the last inquiry was.
Some other things that may factor into determining your average credit score include:
- The length of your credit history
- Seriously delinquent accounts
- Number of revolving accounts
How to Improve Your Average Credit Score
Keep in mind that your average credit score will fluctuate regularly, even on a monthly or weekly basis, in some instances. The score or number requested by the lender regarding your credit will be from data gathered on the exact day of the request. Despite this ever changing number, there are still many ways to improve your score for the financial future, including:
- Stay away from your credit limit: Lenders also look to see how close you are to your credit limits in order to judge how much of a risk you would be in overdrawing, or defaulting on your new account. If you have a credit card with a limit of $5,000, try to never go over the $3,500 mark.
- Study your credit report: Thoroughly read through your credit report to be absolutely certain there are no errors that could be negatively affecting your FICO score.
- Pay on time, every time: While the scoring system is set up to allow for the fact that most everyone misses, or is late with a payment from time to time, the fact is, the less this happens, the higher your score will inevitably climb. However, it is helpful to know that a late payment you made three months ago will have far more of an impact than one that was late three years ago.
