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Americans with the Lowest Credit Scores

Americans with the Lowest Credit Scores

Role models are a thing, but so is the opposite: what can we learn from Americans with the lowest credit scores?Credit scores are the backbone of financial solvency. Without a decent credit score, Americans will find it harder to get approved for home loans, car finance loans, business and personal loans. Or, to get these at an attractive interest rate, at the very least.

The average credit score is as high as it has ever been at 695. However, there exist Americans, whose credit scores dip well under 620. Who are these people, and what can we learn from them?

Are Millennials Blame-Worthy for Low Credit Scores?

At first sight, people tend to target the younger millennials, 18 to 30. These millennials are viewed as fiscally irresponsible because their credit scores are in the bad credit range. But it’s possible to give them a pass on this one, due to the 2009 CARD Act. The CARD Act has made it nearly impossible for the 18 to 21 demographic to apply for new credit cards. The outcome is young millennials struggle to build a credit track record.

The way the FICO scoring, and other similar scoring systems, work is by assessing a number of factors. These include:

  • the number of tradelines (sources of credit) a person has
  • the payment history of each (do they pay consistently and on time?)
  • their debt-to-limit ratio (over 30% of one’s credit limit will lower the score)

When young millennials cannot open enough credit, it will take years upon years to raise their credit scores to an acceptable level.

The Largest Debt Burden Falls to Growing Families

With all this being said, let’s turn our attention to the 30- to 39-year olds. This is the highest percentage demographic that has the lowest credit scores. Why do 30-somethings possess the lowest credit scores? It’s not they haven’t had enough time to build a healthy credit payment history. They’ve had a decade or more.

Evidence suggests people in this age range are debt-burdened up to their ears in student loans, lavish weddings, house payments, and starting families. We’re not including all the expenses it takes to furnish an upper-middle-class lifestyle. These include cars, vacations, school tuition, healthcare, pre-school, etc.

What compounds the settling-down-and-starting-a-family-meet-mate-and-propagate chain of events is the glaring statistic. Just 41% of adults in the U.S. put together a budget and stick to it. Is it any surprise then 30-somethings are challenged with keeping their credit scores healthy?

The Devil is in the High Interest Rates

The bug-a-boo to possessing a low credit score is the higher interest rates you must pay to get approved (provided you do) for new lines of credit. If you’re trying to manage multiple credit cards with higher interest rates, you’re going to be in debt. We dramatize the swelling of debt exponentially for a reason: to get you to take steps to rein in your lines of credit, do some repair work on them, and get with the program of learning how to manage your debt load and improve your credit score.

The 30% Solution

We repeat: never exceed 30% of your credit limits. If you’ve got a $1,000 limit on one credit card, you’re wise to stop your spending at $300. Otherwise, the big three credit bureaus will ding your credit score. Multiply this by the other credit cards you may also be carrying. If you’re exceeding 30 % of your credit limit on those too, you’re going to end up with more damaged credit. The more hits to your credit scores, the lower your credit score.

Lenders look at the aggregate of your credit accounts. This is to judge whether you’re a good credit risk for future lines of credit. If they see you’re doing a shoddy job of managing your credit cards, approval is either off the table, or excessively high interest rates will be charged if you’re approved.

Let’s Get Real

To get concrete about how bad credit can set you back financially here’s an example: If you’ve got a pretty respectable credit score of 700 (average / fair), and you sign on to a 30-year house mortgage of $300,000; at today’s interest rates you’d qualify for a 4.101% interest rate. That would come out to $1,450 for monthly house payments.

However, if your credit score is an abysmal 620 (bad), the interest rate would shoot up 1.367% to 5.468%, and now your monthly house payment would be $1,697. That $247 difference each month could add up to approximately $3,000 on just the interest each year. You can run the figures yourself, but over 30 years (interest and monthly payments combined) it would top out at nearly $2 million more you’d be paying for your home!

Takeaways

We paint a drastic scenario of what a low credit score can do to your finances and the future health and well-being of your family. All in order to get your attention on how to improve your credit score:

  • Go to the big three and pull your credit report to find errors. You may be one of the 20%, whose credit report does contain errors. Disputing those errors and resolving them could bump up your credit rating immediately.
  • Start paying down credit cards with high interest as much as you can afford. Tighten your belt and / or take a side job for the time being to help get those high interest debts as low as you can or paid in full.
  • Once again, we re-emphasize not to use more than 30% of your credit limit. Lenders look favorably upon credit card holders, who can control their spending.
  • One final word of advice: you’d be prudent to sign up for autopay email reminders. A safer route (because autopay has been known to screw up) is to set up monthly bank transfers to pay your expenses.

For more information on average credit scores in America according to age, income, state, and home buyers, including tables and charts go to https://www.valuepenguin.com/average-credit-score.

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The Average Credit Score in America – And What You Can Learn From It

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?

Understanding Credit

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.

Why Improve?

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 ScoreAPR (%)Total Interest ($)Difference vs. Top Tier
760-8503.909%$174,966N/A
700-7594.131%$186,499+$11,533
680-6994.308%$195,807+$20,841
660-6794.522%$207,194+$32,228
640-6594.952%$230,503+$55,537
620-6395.498%$260,897+$85,931

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.

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5 Riveting Things You Probably Didn’t Know About Credit Scores

5 Riveting Things You Probably Didn’t Know About Credit Scores

Credit scores are a significant part of adult life. A person’s credit score can greatly affect how easy or expensive it is to buy a house, finance a car, apply for a credit card, or rent an apartment. Good credit makes all of those things a lot easier. And yet, there are many aspects of credit scores that many people don’t know but would be useful to ensuring that you have a good credit score.

1. Millions of people don’t have a credit score

Don’t be one of them. By default, you don’t have a credit score if you don’t use credit. It’s very important to build your credit history and use credit cards (responsibly) as opposed to cash or debit cards all of the time. In order to have a FICO credit score (the most common credit scoring system), you need to achieve these attributes:

  • At least one account opened for more than 6 months
  • At least one account that’s been reported to the credit bureaus within the past 6 months
  • Have no indication of being deceased on the credit report (this is rare, but mistakes can and sometimes do happen)

2. You have more than one credit score

There isn’t a single source of truth when it comes to credit scores. In fact, there are 3 major credit bureaus: Equifax, Experian, and TransUnion. Each of these bureaus maintains their own score for every consumer that it knows about (so again, you need to have used credit to get on their radar). Therefore, you will have 3 different credit scores, each of which will most likely be slightly different from the other 2. Some lenders look at just 1 score, while others look at 2 or 3 of these scores. Because of this, it may be worth spending the money to know what your score is from all 3 of these credit bureaus. Mortgage lenders will look at all 3 scores and take the middle score to figure out whether you qualify for a loan with what percentage interest.

3. Not using your credit can lower your credit score

Just because you have credit cards open doesn’t mean that you can just stop there. It’s important to keep your credit usage active so that you have a history of making payments on time. This might seem slightly counterintuitive because generally, the lower your credit utilization, the better your credit score. Yet, a 0% credit utilization does not help and may even hurt your credit score. The sweet spot is getting to a very small, but non-zero, utilization rate. It helps to keep even a small credit card balance on one or more cards.

4. Bad credit can be fixed

If you feel your credit score is lower than you want it to be, don’t fret. There are many things you can do to improve your credit score. Negative information is typically dropped from your credit report completely after 7 years, and the impact of those negative marks will have less of an effect on your credit score over time as you generate more recent history of on-time payments. There are some exceptions. Bankruptcies will stay on your credit report for 10 years, and unpaid tax liens will stay on your credit report for 15 years.

For more tips on how to repair your credit, view our 2017 Guide to Credit Repair.

5. Checking your credit doesn’t impact your score

You’ve probably heard that credit inquiries hurt your score, so why are we saying it doesn’t impact your score? There’s actually a difference in types of inquiries. There are “hard” inquiries, which occur when you apply for new credit such as a loan or a credit card. These can impact your score, so it’s best not to, for example, open up too many new credit card accounts at once. Then, there are “soft” inquiries, which occur when you check your own credit or even when a credit card company wants to pre-screen you for a credit card offer. You’re also entitled to a free credit report every year, so not only does it not impact your score, it can be free too!