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What Should Your Credit Score Be?

by Usama Tariq - 18 Apr 2022, Monday 145 Views Like (0)
What Should Your Credit Score Be?

A credit score is a number that helps lenders evaluate a person's credit report and estimate their credit risk. The most common credit score is the FICO score, named after the software developers Fair, Isaac, and Company. An individual's FICO score is provided to lenders by the three major credit reporting agencies Experian, TransUnion, and Equifax to help lenders assess the risk of extending credit or loans to individuals.

A credit score is a number that helps lenders evaluate a person's credit report and estimate their credit risk. The most common credit score is the FICO score, named after the software developers Fair, Isaac, and Company. An individual's FICO score is provided to lenders by the three major credit reporting agencies Experian, TransUnion, and Equifax to help lenders assess the risk of extending credit or loans to individuals.

key takeaways

  • A credit score is a financial tool used by banks and other lenders to make decisions about loans or credit offers. 
  • Credit scores are earned by owning and maintaining a line of credit.
  • An important metric for calculating a credit score is the payment history on an open line of credit.
  • A credit score deemed "very good" or "exceptional" by FICO (Fair Issac Corporation) is in the range of 740 or higher. 

Examples of how credit scores affect loans

A person's credit score affects their ability to qualify for different types of credit and different interest rates. Those with high credit scores can qualify for a 30-year fixed-rate mortgage at 3.8% APR. For a $300,000 loan, the monthly payment would be $1,398.

Conversely, a person with a low credit score, assuming they qualify for the same $300,000 mortgage, could pay 5.39% of the loan, corresponding to a monthly payment of $1,683. That's an extra $285 per month, or $102,600 for the life of a mortgage, for people with a lower credit score.

The importance of having a strong credit score goes beyond mortgages. For example, if you have a good to excellent credit score, you are more likely to qualify for the best rewards credit card.

The FICO credit score takes into account five financial factors. The two most important factors are a person's payment history and the amount owed on their account.

Get a good credit score

Unfortunately, when it comes to credit scores, we're not all smooth sailing. Everyone has to get good numbers and it takes time. Even if all other factors are held constant, younger adults may have lower credit scores than older adults. This is because the length of the credit history accounts for 15% of the credit score.  

Younger people are disadvantaged simply because they don't have the deep credit histories of older consumers.

Factors Affecting Your Credit Score

Five factors are included and weighted to calculate an individual's FICO credit score:

  • 35%: Payment History
  • 30%: arrears
  • 15%: length of credit history
  • 10%: New credit and recently opened accounts
  • 10%: Type of credit used 

It's worth noting that FICO scores don't take age into account, but they do measure the length of your credit history. While younger people may be disadvantaged, people with shorter histories are also likely to have favorable scores based on the rest of the credit report. For example, newer accounts lower the average account age, which in turn lowers your credit score.

FICO likes to see established accounts. Young people who have several years of credit accounts and no new accounts lower the average account age may score higher than those with too many accounts or those who recently opened accounts.

Average credits by age

FICO scores range from 300 to 850, and only 1.2% of consumers have a perfect credit score. Generally, a very good credit score is 740 or higher.  

This score will qualify a person for the best interest rates on mortgages and the best terms on other lines of credit. Financing on some loans is usually guaranteed if the score is between 580 and 740, but as credit scores fall, so do the rates. People with a credit score below 580 may have a hard time finding legitimate credit of any kind.  

According to data collected by Credit Karma, there is a correlation between age and average credit scores, with scores rising with age. According to their data, the average credit scores by age are as follows:

Remember, these are averages based on a limited sample of data, and many individuals have credit scores above or below these averages for various reasons.

For example, a person in their 20s can achieve a credit score of over 800 by making prudent credit decisions and paying bills on time. Likewise, someone in their 50s might have a very low credit score because they took on too much debt and delayed payments. Anyone trying to get out of a bad credit score, young or old, should consider seeking help from the best credit repair agency.

Bottom line

The Experian National Credit Index study helps explain how the behavior of certain age groups affects average credit scores. The study found that the 18-39 age group had the most delayed repayments in the past 12 months, the 40-59 age group was the most indebted and the 60+ age group had the lowest average credit utilization (credit used). least).  

While it's not unheard of for young people to have excellent credit scores, more generally, these ratings rise as people gain credit, make prudent credit decisions, pay bills on time, and increase the depth and length of their credit history.