Digital News Report – During the recession credit the average credit score has been declining. According to a study released last year by Fair Isaac, millions of Americans have seen their credit score decline. There is an estimated 44 million people with a score of 600 or lower.
Average and Median Credit Score
The FICO score is probably the best known credit score. Although the average score may change, the median FICO score will always be 723. That means half of the credit scores are above 723 and half of the number of scores are below 723. The average is the sum of the credit scores divided by the total number of credit scores.
Besides the FICO score provided by Fair Isaac, there are several other score providers.
According to Experian, the average score is 692. They found that the people in New England had the best average score of 712. The west-south central portion of the country had the lowest average score of 673. Those states include Texas, Oklahoma, Arkansas and Louisiana. That section of the country had the second greatest amount of outstanding credit.
Credit Score Ratings
Credit scores are used to determine the creditworthiness of an individual. Lenders will use this score to determine their risk for a particular borrower.
The FICO score takes several factors into consideration and those factors are weighted. In other words, some factors are more important in determining the final credit score.
Understanding how the score is computed can help borrowers improve their score.
Here are the factors that affect credit scores:
Payment History – This is the most important factor and accounts for 35% of the score. On-time payments are critical to a good credit score.
Credit Utilization – This is the second most important factor and accounts for 30% of the score. This is a ratio of how much revolving debt is available to how much is used. Borrowers can improve the ratio by paying down their debt. Closing out a credit card will hurt the ratio.
Length of Credit History – This is the third most important factor, accounting for 15% of the score. Young people with a short credit history will not score as well as someone with a long history.
Recent Inquiries – This accounts for 10% of the final score. Not all inquiries will hurt the score. If you check your own credit score, or have your employer check it, the score should not be affected. Even several inquiries when you apply for a mortgage or personal loan may not affect it.
Types of Credit – What type of credit do you use? This could affect your score and also accounts for 10% of the total score. According to a report from Kipplinger, paying off a mortgage may negatively affect a credit score if it was your only installment loan. Lenders want to see a mix of credit.
Court judgments and tax liens will negatively affect a credit score. Consumer finance loans, like payday loans, rent to own loans, subprime mortgages or car title loans can bring down a credit score.
Free Credit Reports
The FACT Act (Fair and Accurate Credit Transactions Act) gave each legal U.S. resident the right to one free credit report per year. Each reporting agency must provide the report upon request.
The reports may not include the FICO score. There may be a charge for that. Credit monitoring services can provide the score.
Credit Score Range
The FICO score will range from 300 to 850. Approximately 60% of the scores are skewed higher and will range between 650 and 799. Loan agents will typically say that borrowers need a credit score of 723, because that is the median.
There are four major reporting agencies, Equifax, Experian (formerly TRW), TransUnion and Innovis.
Other credit scores are the NextGen score and the VantageScore.
By Tina Brown