Americans’ Credit Scores Not So Hot

A recent Credit Sesame research report shows that the average credit score in the United States is 625. While it could be worse, let’s be honest, 625 is not a very good score.

To put it more succinctly, according to the Credit Sesame report, “That’s a score most lenders would consider subprime.”

Ouch.

Full disclosure, Credit Sesame is using a VantageScore 3.0 scoring model to determine the 625 average U.S. credit score. The VantageScore was developed by the three national credit-reporting companies – Experian, TransUnion and Equifax, and is considered the most consistent, predictive and accurate measure of consumer creditworthiness.

It’s important to note, though, the VantageScore is not a FICO score.

A VantageScore 3.0 of 625 roughly translates to a 650 FICO score – the more old school, and well-known credit-scoring model.

Whether VantageScore or FICO, if you read my post “The FICO Score” you know that anything in the range 620-659 is only considered a “fair score” that “should allow you to qualify for a loan, but the interest rate will not be the best.”

There are plenty of reasons cited in the report to account for such a low average credit score in the U.S. None of which are very surprising.

What does come as a surprise is the limited understanding many Americans have when it comes to their credit score, and what can be done to turn a mediocre score around.

Importance of a Good Credit Score

In my article, “The FICO Score,” I also mentioned how your credit score affects more than just your ability to borrow money. Credit scores are used, in part, to determine car and home owners insurance rates and also can play a role in whether or not you get a job, even if the position has nothing to do with handling money.

The credit score is used as a determiner of risk –with regard to money as well as life practices.

Those factors in mind, you can see how important it is to get, and maintain, a good credit score.

Raise That Score

So, if you’re in that average credit score range, what can you do to raise your score?

These tips will go a long way to improving a lackluster credit score.

Make payments on time. Whether it’s a car loan, mortgage or credit card, make your payments on time. Your payment history is the largest part of your credit score, comprising 35% of what matters when calculating a FICO score. If you have late payments or delinquent loans on your credit record, start now making those payments on time, every time. Negative marks will affect your score less and less as they age. And after 7 years will disappear from your credit report.

Reduce revolving loan/credit card debt. The next largest factor in determining a FICO score is credit utilization. If you have a credit limit of $5,000 on a credit card and you use $4,000 of that credit limit, the high utilization rate will negatively affect your credit score. Pay down your credit card balances to reduce your overall utilization rate. The lower the utilization rate the better, but a goal of 10% utilization would be acceptable – anything higher and a goal of paying down that debt needs to be a focus.

Keep old credit accounts open. Length of your credit history plays a part (15%) in your credit score; so if you have an old credit card, do not close the account. Keep an old account or two open, and in good standing with little to no balance and on time payments, to maintain that long credit history.

Don’t underestimate the importance of the FICO score. Its use is so widespread that it touches aspects of your life that you likely never would have considered.

The above tips can help increase and maintain a solid credit score, but a financially responsible mindset plays a large part as well.

And that’s our goal at Savings Beagle – to help provide information that will nurture that mindset as well as provide savings information and deals that can benefit your fiscal health overall.

Let’s work together to make your financial future that much brighter.

image courtesy of tiverylucky and freedigitalphotos.net