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A credit score is a number that tells about your trustworthiness as a borrower. This number is based on your credit history and activities. Lenders, like credit card companies and banks, use your credit score to judge how likely it is that you will repay any money borrowed.
The most widely used score is the FICO Score. It ranges from 300-850. The higher your score, the more trustworthy you are to creditors.
Factors affecting your credit score
- Payment history
- Total amount owed – Credit utilization
- The length of your credit history
- Types of credit, number of credit cards you have used
- New credit and Bankruptcies
The most important factors on your FICO Score are your payment history on credit cards and other debts, total debts outstanding and the length of your credit history.T
Credit Score – Rating – Percent of People (rounded)
300-579 – Poor – 17.00%
580-669 – Fair – 20.2%
670-739 – Good – 21.50%
740-799 – Very good – 18.20%
800-850 – Excellent – 20.00%
So, this table represent the Basic FICO Scores, this is the one you as consumer can order from the credit bureaus. There are other FICO Scores that are customized or industry specifics. Those scores you as a consumer can’t obtain, there are tailored for industry like auto, credit cards and mortgages. The higher your scores, the less risk you represent to your lenders.
The Basic FICO Scores range from Poor to Excellent. Find out your score and how you can improve it, if you’re falling below average.
What’s the average FICO Score?
According to FICO, the most recent average basic score for US consumers is 704. This is a good score and can land you loans and other credit at average interest rates. This increase also means that the average consumer has seen an improvement over previous years of their credit worthiness.
This average score represents an increase over previous years, especially over the period from 2008 to 2010, when the economy collapsed and there was a credit crunch affecting many people. The reasons for the improvement in the average FICO Score are probably more financial education and a better economy.
I”m not at the average FICO Score level, what can I do?
Even though the average score has gone up, a lot of people are still struggling with below average score. From the table above, around 40% of consumers are scoring below average. Don’t get discourage because there are some steps you can take to improve your creditworthiness to lenders.
It’s important to have a good credit score in order to look good to your potential lenders and credit card companies. A better credit score means you can get approve for loans and also get good interest rate terms. This result in you paying less for credit and saving more money. No one wants to pay high interest rates because this takes away money from your pocket.
Even though 850 is the highest FICO Score attainable, you don’t have to have a perfect score to obtain credit at favorable rates. However, it’s useful to look inside the habits of a person who has attained the perfect score of 850. Is a good exercise to try to emulate some of these credit habits to improve your own.
Under the hood of a 850 FICO Score
This is only a guideline and there are certainly other ways to achieve the perfect score.
- Payment History: 100% on time payments
- Credit utilization or Use of credit approved:Maximum 10% utilization
- Age of accounts or light of time: Average age of accounts 9 years
- Account types: 4-5 accounts types
- Credit inquiries: less than 3 hard inquiries in the past 24 months
- Accounts in collection status: none
- Bankruptcy: none
So you don’t have a perfect score, don’t worry. Here are some of the things you can start doing to move up the credit score ladder. First, order your credit report free at annualcreditreport.com and review it.
Maximize your available credit without using too much. Credit cards are one of the best way to build a credit history and is not hard to get approved.
As long as you pay your bills on time, don’t utilize more than 10-30% of your approved credit and only borrow what you can afford to repay, your report should be getting build with positive information. Doing this overtime will build a strong credit history.
Never miss a payment. Payment history can account for up to 35% of your credit score calculation. This is why you should never miss payments. This can happen to any of us, but it’s best to avoid it by setting up payments reminders on your phone or in writing.
Wait out large expenditures while you build or rebuild your credit. Credit building won’t happen overnight and it’s best to avoid getting caught in debt before you build a solid score. So, wait to buy that new car or take out that mortgage until your credit is average or above.
Knowing the factors affecting your score and adopting some of the habits of a perfect scorer can help you improve your FICO Score. Remember you don’t need a perfect score to obtain loans at good interest rates. However, you do want to improve your score above the national average to enjoy more credit opportunities at cheaper rates.