Average Credit Score
Your credit score shows if you can borrow money from financial companies. It also shows if you can take certain things on credit or not. Before anyone offers you a credit facility they will want to know more about your spending habits, how you repay your debts and the amount of cash that is available to you. Your credit score answers all these questions.
What is a FICO credit score?
The FICO credit score is a credit score model provided by the Fair Isaac Corporation (FICO). This is the most common credit score model used by financial institutions. There are also three credit reporting agencies: TransUnion, Equifax, and Experian.
These agencies compile all the information about your credit habits and make it available to organizations who need credit information about you. Since there are three main credit reporting agencies, you may receive three different credit reports. The differences may not be huge.
Factors that Affect Your Credit Score
The FICO credit score model uses the following information to calculate your score.
- Your payment history for your loans and credit cards. It also includes the number of credit facilities you have taken and accounts of late payments. This makes up 35% of your credit score.
- Your total debt. This makes up 30% of your credit score.
- The number, type, and age of your credit accounts. This also makes up 15% of your credit score.
- Types of new credit used. This also accounts for 10% of your credit score.
- The number of new credits. This accounts for 10% of your credit score.
The following information is not considered when calculating your credit score.
Your religion, color, sex, age, marital status, race, national origin, are not included. The U.S law prohibits institutions from adding these to credit scoring models. Your employment history, salary, occupation, employer, and date employed is not considered when calculating your credit score. However, a lender may ask for these before approving your loan.
The FICO 8 Score is the commonly used FICO scoring model and it ranges from 300 to 850. There are other scoring models, in fact, they are 28 in all. The credit score is typically classified according to the following:
850 – 720: Excellent credit
719 – 690: Good credit
689 – 630: Fair credit
629 – 300: Bad Credit
What is the Average Credit Score?
The average credit score for American citizens may vary depending on the model used. However, the average score for the FICO score 8 is 700. Even that fluctuates since people’s credit scores keep fluctuating. Unfortunately, about 14% of the American population has no credit score information.
This is because they do not have records of credit activities. It is a great idea to have a credit score that is higher than the average. When you have that, you will get fast access to certain credit facilities.
How to improve your Credit Score?
Always make payments on time
This is one thing that can improve your credit score immensely. Paying your debts on time shows a responsible lending behavior and that will improve your credit history. Missed payments are one of the things that affect your credit score negatively.
When you do not pay your loans on time, lenders are likely to report the missed payments to credit reporting agencies and that will drop your score. Late payments can lower your score by 60 to 110 points which is huge. Late payments can also attract some penalties that will make it more difficult for you to pay your debt. Late fees are charged as a percentage of your amount and they can increase your monthly payments.
Do not max out your credit card
Ideally, you should try as much as possible to pay off your credit card balance at the end of the month. You should also make sure that you do not go beyond your limit. When you pay off your balance at the end of the month, you do not need to pay interest rates on the amount you have used. That can save you some money.
Pay Down Your Debts
This sounds easy but it is one of the most difficult things to do. You will need to adjust your lifestyle to save up enough to pay off your debts. If you continue to live the kind of lifestyle you used to live, you will not be able to save enough to pay off the loan.
You must reduce your spending to make it easier for you to pay off your debt. If you want to be successful at paying down your debt, you should make a budget. Your budget should exclude as many luxury items as possible. You should do away with expensive restaurant visits and impulsive shopping.
Since this will not be permanent, make sure you reduce your spending as much as possible. If you know you will be tempted to make unplanned purchases, you can start leaving your credit cards at home.
When you make payments with cash, it is difficult to spend more than you have planned. Another thing with cash payments is that you cannot shop more than you can afford. You will shop according to the amount of money you have with you. When you begin to live according to a well- planned budget, you will be able to save more cash to pay down your debt. Paying down your debts improves your credit score a lot.
Check your credit report regularly
You should check all three credit reports regularly. There are instances where errors on your credit report will lower your score drastically. It is important that you always check your report so that you confirm all the information on the report.
When you check your report, confirm that your personal details are all correct. You should also check to see if you recognize all the accounts on your report. It is important that you recognize all accounts because of instances of fraud. Some criminals may use your details to get credit facilities and then that will affect your scores.
Identity is a serious issue since the criminals will not repay the credit they stole with your identity and since you do not know about it, it will go unpaid for a long time. You are already aware that missing payments does a lot of harm to your credit score.
When you check your credit report you can check all these issues, including identity theft and other errors. You can access one free credit report from each of the three agencies. These reports are available on annualcreditreport.com. It is recommended that you check one report in four months and then you check the next one in the next four months. That means that when you check the credit report for Experian in the first four months, you will check the one for TransUnion in the next four months.
When you do this, you will have a fair idea of what is going on in your credit report. Sometimes, they may report a late payment which was actually made on time. If you check your report, you will be able to make corrections if any.
When you spot a wrong entry on your credit report, you can file a dispute to correct them. You can file a dispute by calling the credit reporting agency through the number that is available on your credit report. You can also file a dispute online through the website.
There is yet another way to file a dispute. This is by mail. You will need to submit a certified letter along with a copy of your credit report. You should also include any document that can help you to clearly describe the error. The credit reporting company will contact the firm involved and then they will investigate the issue.
If they realize that there is an error in the information they provided, they will make the necessary corrections. The credit reporting company will then inform you about it. You can ask the credit reporting company to notify all institutions and individuals who accessed your report in the last six months. Once the corrections are made, your report will improve.
Why Do Credit Scores Matter?
Your credit score is a decision-making tool for lenders and other financial institution. They use your credit score to determine if you are eligible for a credit facility. Credit scores are also referred to as risk scores because they help lenders to determine the risk involved in lending to you.
A good credit score is very important especially if you want to access credit easily. A good credit score will also help you to access loans at low interest rates. It is less risky for lenders to offer credit to people with good credit scores. This means that you can save some money on interest rates if you have a good credit score.
The higher the credit score, the lower the risk involved in lending to the borrower. If you have a good credit score, you can also rent an apartment easily. It is even easier to get a cell phone service when you have a good credit score.