The Nation's Average Credit Score Is on the Precipice of a Major Milestone

By Sean Williams Markets Fool.com

Whether you realize it or not, your credit report can have a pretty significant impact on your financial well-being.

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When most Americans think of their credit score, they're thinking of whether they'll qualify for a home loan, or a new credit card. While this is one of the more common reasons a good or excellent credit score can come in handy, it's far from the only reason.

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In addition to helping you qualify for a mortgage or a credit card, and assisting lenders in determining what interest rate you qualify for (higher credit scores usually merit lower interest rates), your credit report can be used by landlords should you try to rent an apartment, condo, or house. Prospective employers may also ask for permission to view your credit report during the hiring process. Even your insurance companies and utilities may want a sneak peek at your credit report before offering to cover you and beginning your utility service. If you have a number of black marks on your credit report, you may lose out on the apartment or house you want, you may not get the job you desire, and you could pay more for insurance, as well as need to put more money in deposit to begin utility service.

The U.S. is on the precipice of a major credit score milestone

Yet here's the good news: The nation's average credit score has been moving higher in steady fashion since the trough of the Great Recession. In fact, the nation's average credit score is now bordering on a major milestone.

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According to data from FICO, which was aggregated by Bankrate, average credit scores across the country have risen from 686 in 2009 to 699, an all-time high, as of April 2016. This means the average American with credit is just one point away from hitting a FICO score of 700 for the first time ever, and also moving into the "good" credit score range of 700 to 749 on a scale of 300 to 850.

Data from NerdWallet, also culled from FICO, as of April 2015 showed that 19.9% of all adults had a credit score of at least 800, with 54.7% of at 700 or above. By comparison, scores of 599 and lower are usually considered "bad," and just 21.9% of Americans fell below this threshold. Since 2009, there have been far fewer people with low credit scores, and many more with scores in the 700s and 800s.

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Why, you ask?

For starters, we're now more than seven years past the end of the Great Recession, and since negative payment history remains on a person's credit account for seven years, we may be seeing this negative information dropping off reports and helping credit scores.

Another strong possibility is that people with poor credit scores are no longer using their credit cards or have mortgages, and thus have been removed from the credit score computation model. Think of all the short sales we saw between 2009 and 2011 that could soon disappear from FICO's credit-scoring models.

There's still work to be done

On one hand, an all-time high for FICO scores is a great thing. It likely means that consumers are being smarter with their spending, and that translates into more lending options and better interest rates. But there's still much more that can be done.

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To begin with, according to TransUnion, one of the three credit reporting bureaus, one-third of Americans had never checked their credit report as of 2013. Consumers are allowed to check their credit report for free from all three reporting bureaus (TransUnion, Experian, and Equifax) once annually using AnnualCreditReport.com. You'll want to take advantage of this free report because it's always possible errors could be lurking on your credit report in one or more of the three bureaus. Correcting reporting errors is a quick way to boost your credit score with pretty minimal effort.

What's more, checking your credit report doesn't ding your credit score, which is a pervasive myth. Checking your credit report counts as a "soft" inquiry, or one that's surface-scratching. Hard inquiries, or those a lender would commence when opening a new line of credit, are the type that can temporarily harm your credit score.

Consumers would also probably find themselves on better credit footing if they paid closer attention to their account history and credit utilization.

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For example, FICO scores take into account the average length of time that your credit accounts have been open. Some consumers might be under the impression that they'll get brownie points from the credit bureau for "being responsible" and closing an account, or accounts, they rarely use. However, closing accounts in good-standing can lower the average length of time your accounts have been open, ultimately hurting your credit score.

In similar fashion, closing credit accounts means lowering your available credit. If you happen to be carrying a balance on your other credit accounts, closing accounts means your credit utilization ratio (i.e., how much of your available credit you're using, expressed as a percentage) will go up. Any higher than a 30% credit utilization and you can risk being dinged by the credit bureaus for being irresponsible.

With just some minor changes, America can cross the 700 FICO score barrier and continue motoring higher.

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Sean Williams has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.