The Average Credit Score in America – And What You Can Learn From It
In America, the average credit score has gone up a few points, teetering at the edge of 700, according to the latest FICO data. This respectable score is up five points in 2015. While this could the result of a change to the FICO scoring method, it nonetheless offers a chance to review what credit really is, and why taking on debt can help you save money.
Today, while 43% of Americans have a delinquency affecting their credit score, for most of them, that delinquency is 17 months old. What’s more, the average American has used up to 15% of their available credit on things like credit cards, and they have a full six open revolving credit accounts all of which have outstanding balances. Why?
As the name suggests, credit is a form of paying it forward. Credit gives you money based on how likely you are to repay that money. For each line of credit you receive, whether it is a loan or a credit card, the interest rate you pay is based on how likely that repayment will be.
Treated as a business, the industry of credit is one that traps people in a race against time. Someone who might, for example, have the earnings to repay a car loan early and have the debt off their shoulders is treated to an early repayment fee. Early repayment fees are a way for companies lending funds to ensure they are still profiting from the loan. This is even if you are timely in your payments. Monthly bills when paid on time for things like a credit card do not acquire any interest. However, when they’re paid even one day late, they’re charged incredibly high fees. Things like mortgage loans have lower interest rates, but because the loaned amount is higher, the total accumulated each month. These loan amounts adds up quickly.
How You Get Scored
The unfortunate thing for many is that without a good credit score, getting reasonable rates for things like a home mortgage or other loans will be quite high. Starting off without any credit history means that in order to earn a good credit score, you have to take on debt, and then slowly, painfully, repay that debt.
Having the funds up front to pay for a lower end car in full earns you next to no credit, which means it does not help your credit score to rise, rather, keeps it steady, unchanging. As such, taking on a line of credit, even if you do not need it, is the only way to earn a higher score. Each month that a debt or line of credit is repaid, it gives you the chance to show that you can be trusted to repay a debt. The more months you repay on time, and the more things you repay each month, the more companies can rely upon you to give them the profits they are seeking with loans and lines of credit.
Increasing Your Score
So, if you have checked out your score for the first time, you might see that without any debt, without any credit checks, and without any credit cards in your name, your score is lower than the national average. In order to bring it up, you have to apply for and secure a debt against you, then slowly repay that debt.
When buying a new car, one way to do that is to pay a large enough down payment that your overall interest rate can be lowered in spite of an average or below average score, then make monthly payments on the rest. Both things work in your credit score’s favor.
In the case of a credit score, you should not settle for a “fair” report, or whatever figure you have. Reason being, better credit scores save you money long term. Consider that you want to buy a house. If you are getting a thirty year fixed rate mortgage at a rate of $250,000, your credit score translates into direct savings. Consider the charge below:
|FICO Score||APR (%)||Total Interest ($)||Difference vs. Top Tier|
DATA SOURCE: MYFICO.COM
Illustrated here, the higher your credit, the more money you save in total interest.
What to take away
What’s important to understand is that you are not alone. No matter what fiscal issue is keeping your score down, even the top score holders have the same issue. In fact, the average “high achiever”, those with a score over 800, have nine open revolving lines of credit. This is three more than average. Given the aforementioned credit information, it makes sense that higher score earners are using more lines of credit and debt to their name. This allows them to make more payments on time, thus cementing the notion that they are “good for the money”.
Most people do not realize that 30% of the FICO score is taken from amounts owed on credit lines. As such, the higher achievers often use just 4% of their available credit. On the other hand, compare this to the 15% for average score holders. While 43% of Americans have a delinquency on their report, 5% of higher achievers do too. Average Americans have 100% of their accounts with an outstanding balance, while higher achievers have but 70%.
Overall, the same fiscal issues are faced by all. The difference is in their impact or severity. Paying bills on time, not using all of the credit you have available to you. In conclusion, not letting accounts get sent to collections all work in tandem will improve your score.