How Does Your Credit Score Compare to Others and What Can You Do to Improve Yours?
When it comes to personal finance — and let’s be honest, many other parts of our lives — we can’t help but be a little curious about how we compare to others. While each of us has our own financial journey, and we shouldn’t spend too much time with comparisons, there are times when it’s helpful to understand where others are in their journey too.
The same is true with credit scores. There are benefits to understanding where the rest of America falls along the lines of FICO scores and other financial indicators. This gives us a better idea of what to strive for, and how a lender may view us when we need to apply for credit.
Fortunately, Experian has satisfied some of this curiosity for us by publishing the 2020 Consumer Credit Review. It’s a fascinating look at how consumer’s behavior with credit shifted during — I think we can all agree — one of the most volatile and unpredictable years in recent memory. But it’s also a great tool to review our own financial health.
More importantly, what can we learn from these trends that can help us make wise financial decisions when it comes to our own credit? Perhaps there is something we can take from this information to better our own financial management.
The average credit score
Let’s get right to it. Experian’s Consumer Credit Review showed the average credit score for Americans in 2020 increased to 710. This is up +7 points from the previous year. How is it even possible that during one of the worst years of our lives our credit scores would actually improve?
There are several potential factors to explain this, according to Experian. For starters, missed payment reporting is down. This means not all creditors reported when someone paid 30 days or more late. Plus, some lenders gave accommodations for payments without additional penalties.
Secondly, the stimulus checks were likely put towards debt payoff by a portion of Americans. When we received money from the government, some people were able to apply it to debt.
Undoubtedly these are not the only contributing factors, but these were the two cited by Experian as having the largest impact.
The good credit score range
The report also reveals that 69% of Americans now have a credit score of 670 or above. This is significant because a FICO score of 670 or better is considered within the “good” credit score range.
For borrowers, landing in this credit score range or better means you should qualify for most loans and credit. While you may have to pay a higher interest rate versus someone with an excellent credit score, obtaining credit should not be an issue if your score is 670 or higher.
Average credit card debt has decreased
Another interesting trend coming out of 2020 was the decrease in credit card debt. The average American’s credit card debt decreased to $5,313 in 2020 versus $6,194 in 2019.
This may not seem surprising given the fact everyone was shut in for months without the ability to spend in-store or travel, therefore the money went towards debt payoff. But it could also indicate the stimulus check money might have been used as well, as mentioned earlier.
While credit card debt decreased, student loan debt saw an increase of 9% in 2020. This is to be expected since the CARES Act passed in 2020 allowed a pause on federal student loan payments. If you are not required to pay your federal loans, then it’s possible you’re paying more towards credit card debt versus student loans.
Everyone’s personal finance story is different and we may never fully realize why credit scores change why they do, but it is compelling to see how specific types of debt either increased or decreased.
The credit score increase was higher in some states versus others
As it turns out, where you live also has a bit of an impact on how your credit score changed in 2020. While all 50 states plus Washington D.C. saw an increase in credit scores, Washington D.C., Arizona, Delaware, North Carolina, and Idaho saw the biggest impact. These states (and city) led the country with a +10 improvement versus 2019.
However, North Dakota, South Dakota, Hawaii, Nebraska, and Vermont saw the least amount of increase, starting at a half a point increase. This was the first time in years where every state realized some sort of increase in credit score.
Millennials increased their credit score average the most Of all the generations, the Millennials realized the biggest increase with credit scores in 2020 — even with their side parts and skinny jeans.
The average credit score for Millennials (ages 24 to 39) in 2020 was 679, versus 668 in 2019. Generation Z however (ages 18 to 23), increased their credit score an average of +7 points, to 674 in 2020.
While this information on consumer behavior may be interesting to some, what really matters is your own credit score and why your credit history and score is something that follows you wherever you go.
Credit score basics
Your credit information is reported by lenders each month to the three credit bureaus — Equifax, TransUnion, and Experian. The bureaus provide information regarding your credit history and usage. This history and data around usage feed into a calculation, which is how your credit score is calculated.
Credit scores are calculated by using complicated credit scoring models. There are two types of credit scores and scoring models mainly used: FICO and VantageScore. When you are applying for credit, you have no way of knowing which credit scoring model the lender is using, but 90% of lenders use the FICO model.
Each model has a set of credit score ranges, which looks like this:
FICO credit ranges
- Very poor: 300 to 579
- Fair: 580 to 669
- Good: 670 to 739
- Very good: 740 to 799
- Excellent: 800 to 850
VantageScore credit ranges
- Very poor: 300 to 499
- Poor: 500 to 600
- Fair: 601 to 660
- Good: 661 to 780
- Excellent: 781 to 850
important: If you need to rent an apartment, finance a car, apply for a private student loan or personal loan, or a mortgage or store credit card, your credit score will be pulled.
Why is it important to understand our credit score?
Sure, it’s interesting to see how our credit score compares to others and what range we fall into, but why is there so much emphasis on this number in the first place?
Your credit rating is the number assigned to you to show lenders your creditworthiness. The higher your score, the less risk you pose in the lender’s eyes. The bottom line is, if you ever need to use credit, you need a credit score. If you need to rent an apartment, finance a car, apply for a private student loan or personal loan, or a mortgage or store credit card, your credit score will be pulled.
But this isn’t the only reason. Your credit score also determines the interest rates you are approved for. If you have a lower credit score, your interest rates will be higher, which means you pay more interest over time. An excellent credit score allows you to get the approval you need while paying the most competitive interest rate.
Improving your own credit score
If you’ve reviewed this information and decide you don’t like where you fall within the credit score range or how you compare to the rest of America, the good news is, there are actionable steps you can take to improve your own score. Remember, your credit score is updated with the major credit bureaus once per month, so you can see results from your work within a short period of time.
- Keep your payment history positive. There is no other way to say it. If you pay your bills on time (within 30 days) then your payment history will be reported as positive. According to Experian, payment history is 35% of your credit score, so paying your bills on time and consistently leads to a stronger credit score.
- Keep credit utilization low. Credit utilization refers to how much of your available credit you use versus what is available to you. For instance, if you have a total of $2,000 worth of credit limits across your credit account, but you only use $200 of your limits, then you have a utilization rate of 10%. Keeping your credit utilization at 30% or lower is ideal to maintain a healthier credit score.
- Keep credit inquiries to a minimum when possible. Anytime you apply for new credit, this is reported in your credit report. Too many inquiries can have a negative impact on your score.
- Use a credit score boost program with the credit bureaus. Both Experian and TransUnion offer credit score boosting programs. These programs pull your payment history from regular payments, such as utility bills and cell phone bills, that are normally not reported on your credit report. If you have a positive payment history with these services, you can see a nice bump in your credit score.
- Take advantage of a credit monitoring program. Many programs, including Credit Sesame, offer free credit score monitoring services. This is where you are notified each month if your score has changed and if there are any new inquiries. You can even see your MyFico score for free with some sites, such as your bank or credit card company.
- Credit mix can help. Although not as much of a factor, your credit mix could impact your score. This means using different credit tools, such as a line of credit, a mortgage, and a credit card. This is viewed more favorably than using all credit cards, or all student loans for instance.
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The bottom line
While you shouldn’t spend too much time comparing your financial situation to others, knowing where your credit score lands versus others could be useful. This may be the motivation you need to focus on improving your own credit score, or it may indicate to you that you are making great progress and should keep up your hard work.