An average credit score can really hurt you. Find out if you have one and how to improve it.Image source: Getty Images.
Most people want to have excellent credit, or at least very good credit. After all, your credit score affects the rates you'll pay for loans -- and even whether or not you’re eligible for a loan.
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Not everyone can have excellent credit. Some people will have poor credit, and some people will have credit that's just average.
If you're wondering how you fare in comparison with the credit scores of others, you may be wondering exactly what an average credit score is. The answer to this question depends what you mean by average.
The average credit score in the United States
If you want to know the average credit score earned by people in the United States, the answer can be found from FICO data. FICO stands for Fair Isaac Corporation. FICO® Scores are some of the most commonly-used credit scores in the country, although there are many different credit scoring formulas in use.
According to FICO, in September 2018, the average credit score in the U.S. reached 704 on a scale of 300 to 850. This is a record high average FICO® Score. It's up from 686 in October 2009 -- and it's a three point increase from the previous record average score.
The fact the average FICO® Score in the U.S. has hit 704 is a very good sign, because it suggests people in the country are becoming more creditworthy. A score of 704 is considered to be a “good” credit score, while a score above 740 is considered very good and a score above 800 is considered exceptional.
What about a score that's just average?
Average can have another meaning too. It can mean just OK or mediocre. If you say your credit is about average and you mean that it's “fair,” rather than good, very good, or excellent, your score would actually likely be below the average in the U.S.
If you have fair credit, or credit that's just OK, your FICO® Score would likely fall within the 580 to 669 range. That's because FICO® Scores are divided up into five different tiers:
- A credit score of 300 to 579 is considered very poor
- A credit score of 580 to 669 is considered fair
- A credit score of 670 to 739 is considered good
- A credit score of 740 to 799 is considered very good
- A credit score of 800 to 850 is considered to be exceptional
If your credit is fair, you'd pay a little more for loans than someone with good credit would. But you wouldn't be relegated to subprime loans in most cases, and you should be able to get approved for most kinds of financing including mortgage loans and credit cards.
What should you do if your credit score is average -- or worse?
If your credit score is lower than the average score in the U.S., or if it falls within the fair category, you should work to improve it. If your score is below 740, you should try very hard to get into the very good or exceptional score range.
When you have a credit score that's considered very good or excellent, you'll be able to qualify for the most favorable rates on loans you take out. Lenders will be eager to lend money to you, so you won't have to worry about being turned down if you apply for a mortgage or a car loan. And, your credit score and report also won't send up any red flags if employers or landlords look at it as part of a background check.
This doesn't mean you need a perfect credit score to get the best rates. In fact, there's little use in trying for an 850 as it can be almost impossible to achieve and you likely won't get any better treatment by lenders than if your score is 800 or even in the high 700s. A perfect credit score may be a badge of honor, but it's not needed to make the most of your financial life.
How can you beat the average and raise your credit score?
To improve your credit score so your credit won't be just average, it's helpful to know how credit scores are calculated.
While there are many different credit scoring formulas, your FICO® Score is determined based on:
- Your payment history. This accounts for 35% of your score.
- Your credit utilization. This accounts for 30% of your score.
- The length of your credit history. This accounts for 15% of your score.
- The mix of credit accounts or types of credit used. This accounts for 10% of your score.
- The number of inquiries on your credit report. This accounts for 10% of your score.
VantageScore is the other primary credit score you receive in addition to your FICO® Score. It has its own proprietary formula for weighing these factors, but similar things will be considered. Other credit scoring formulas take these same factors into account as well.
Once you understand how your score is determined, you can adjust your behavior accordingly to earn a credit score that's better than average. You can make payments on time. You can keep your credit utilization rate as low as possible, and definitely below 30%. You can make sure to take out a mix of different loans, but avoid applying for credit too often and getting too many inquiries or lowering the average age of your accounts.
By taking these steps, you can earn a credit score that beats the average U.S. score, and that isn’t just fair, but that's very good or even excellent.
Check your credit score today to see how you compare, and start working on improving your score so you're above average by every definition.