Average Credit Score – Introduction
The Great Recession is long gone, and the economy is doing very well overall. The US is near full employment, and the unemployment rate now sits at 4.3%, a little above the all-time low of 4.1% set in 2000. To have a full-time job in America today, a prospective worker needs only a 4.0% credit score. Of course, having a few months of missed payments in your credit history can leave you with a credit score that’s around the 800 level. On the other hand, doing well on the job and with your finances can easily boost your score into the 900 range.
If we talk about the average credit score in America then it is not hard to conclude that it is a massive 750+ score. This is just the average; some consumers have excellent credit scores and some have bad credit scores. But there are other indicators that add to this score such as payment history, debt and credit utilization, past bankruptcies, and yes, your loan to value. In this piece, I will take a look at the averages across various personal finance websites to see how the vast majority of Americans stack up.
Three Factors of an Average Credit Score:
Before we do that though, we should understand exactly what average credit scores are. They are comprised of three factors:
- Length of credit history (the number of credit accounts you have)
- Credit utilization (how much of your total available credit you use)
- Payment history
Length of credit history (the number of credit accounts you have)
The length of time you have had credit makes a huge difference. For instance, if you are a student loan borrower that is using only $20 per month on a credit card, your credit history can be too low and you can be underwater. This is a lot like having no money in your bank account. However, if you are in the 0-2 credit range, it is still a little better than this (we’ll come to why this is important soon).
The length of credit history makes a huge difference as well. The longer you have credited the better while having too many inquiries on your credit is bad. Any inquiries that were for credit will generally be a quick bounce-back for you as most consumers will go out and change their average credit scores. If you are a small-time borrower, you can even get away with zero inquiries on your credit, but having too many inquiries and/or credit balances is problematic.
In recent years there has been a lot of talk about “hard inquiries”, which simply means that a consumer in the middle of building an average credit score has an inquiry on their credit report from another source. This can take down your overall score by 20 points (sometimes as much as 25 points) as if an individual is getting another credit score from a different bureau.
Credit utilization (how much of your total available credit you use)
Credit utilization is the second big factor that affects your average credit score. It represents the percentage of credit that you are using. You can go over your credit limit (as long as you are under a 30% limit) and your credit score will not be negatively impacted, but you can get into trouble if you are using more than 40% of your available credit.
Finally, your payment history. This is just the amount of time you have had a past credit account open, and it essentially accounts for the entire credit score. An inquiry has zero effect on payment history, which is just your total history of payments on credit cards, mortgages, car loans, etc. To a large extent, this represents your “life story” and how good you are with your credit and money. If you get in trouble, credit bureaus will dig deep and determine if you are a good credit risk, and that will determine your score.
These factors are determined by analyzing millions of data points of individuals. It is not easy work and it is not something you do when you get home from work. You can do a quick search on Google for “financial websites in America” and you will see hundreds upon hundreds of sites (at last count at least 5000). Many of them are hosted by financial companies such as Credit Karma, Credible, and Credit Sesame. All of them use a very similar score system.
The Average Credit Score
We decided to go back to 1995 and see what average credit scores looked like back then. Before the easy use of credit cards, this was a much more difficult task. All that is required is finding out how many accounts a person has in the past (“prime” or “non-prime”), and they can get an average credit score.
Back in 1995, people in the U.S. had credit card accounts with an average of around 6.7 accounts. That means there were approximately 14 million people with credit card accounts in the US, but the vast majority of those credit card accounts were either prime or non-prime. The average score was 635. It is still the highest credit score the U.S. has ever seen.
Today, the average credit score is 900+. You will see this at many different times over the course of this guide as we go over credit cards, personal loans, and many other topics. As the quote from our friend Angus Johnston says, “It’s so good that it’s magical.”
The average score has continued to go up significantly over the past few decades. However, that is about to change for a few reasons.
- First, millennials have reached a point where they can not only handle credit but actually want it. Many young millennials use credit cards in large amounts, and that will probably change over time.
- The second reason is the recession. Having a higher credit score back in the 1980s was not only nice but was actually beneficial as well. By the 1990s, many people had gotten into trouble with their credit and were unable to qualify for loans or mortgages. They lost their homes, many had to get personal loans, and many more just got out of the credit loop for years at a time. In many cases, their credit history was negative for multiple years. Today, many are very interested in rebuilding their credit history. They want to be able to qualify for the kinds of loans they used to qualify for. If this happens, you can expect credit scores to be much lower over the next few decades.
There is some dispute about how well millennials will do, but we do not see that as much of an issue. For one thing, many millennials are quite financially aware. Most are quite happy living within their means and are not particularly interested in accumulating more debt. In addition, most millennials have at least a few years before they have kids to worry about. So, for a generation that is used to balancing their finances in many different ways, we see no real reason why they would need to ever think about expanding their average credit score.
The average credit score in 1995 would be more than sufficient for almost any financial situation today. But there are many things you should consider if you plan on buying a house, a car, or even a job. Let’s take a look at some of the things we considered:
1. Household Debt:
It is a relatively safe assumption that the debt that you take on has some sort of correlation to your ability to get a loan. For example, if you have a very low credit score, you will be much more likely to get a high-interest loan. But even having a credit score as high as 750 will not necessarily help you out very much. This is because the higher your score goes, the more expensive it will be to get a loan.
The average student in America carries a total of $26,200 in student loans. That is $24,000 for college plus extra money for private student loans. The average credit score of those students is 765. They are likely to need a much higher credit score to be able to get an auto loan or a mortgage.
The same thing can be said about home mortgages. The higher your credit score is, the better you will be at getting a loan. Your credit score is determined by the average of all of your credit accounts. So, if you have one bad account, that will drag down your score. This is the same reason why you want to avoid any sort of credit card debt. If you can pay off your credit cards every month, you will probably have a pretty decent credit score. But this is not possible for many people.
While banks are still backing away from mortgages, auto loans, and leases, the numbers show that the market is still making loans. There is even some indication that loans are starting to grow again. As more and more leases become more popular, the average credit score will rise. Down payment may be a bit of a problem, but if you can make the down payment, that will usually qualify you for a better rate on the loan. Plus, you will have paid off the amount of the lease in a much shorter amount of time than would otherwise be possible.
The importance of job search is also sometimes forgotten. The length of a career is one of the biggest factors affecting the average credit score. While some jobs will have no impact at all, some positions, such as construction, will have a much more direct impact on your credit score than others. The average construction worker carries a salary of about $32,000 per year. This works out to a credit score of 669. Many construction workers are usually trying to maintain a fairly low credit score, but having a somewhat higher score can help you get a better job that pays more.
5. Company Credit:
An even more indirect impact on your credit score is what company credit score you get from an employer. If you can get a very good company credit score, then you will have a very high credit score that will be very hard to get away from. Companies will work much harder to protect their employees from any sort of credit damage.
6. Job Security:
Many people only think of jobs as getting you a paycheck every week, but the job market is very unpredictable. The economy can take a very bad turn at any time and ruin people’s average credit score. This is why you want to keep an eye on your credit score, even if you are still employed by your present company. You may be able to change jobs or move to another location to try and improve your average credit score.
7. Personal Finances:
An even bigger factor in determining your credit score is the way you manage your personal finances. If you spend recklessly, you are putting a lot of strain on your credit score. The thing is, if you are careful and keep a good handle on your personal finances. Then you are just as likely to see a higher credit score as if you were employed by a large company that you worked for.
The average credit score is the most important thing in determining your credit score. It is a number that most people never think about. But it can be the difference between getting a good interest rate on your mortgage or getting a low-interest rate on your auto loan. It can help you get a better job or get a better job than doesn’t pay as much. The main thing is that you need to make sure that you do not put any undue strain on your personal finances. In other words, you need to make sure that you are making smart financial decisions every single day. It is not a perfect gauge of your creditworthiness. But it is a good starting point to decide how you will be managing your finances and the credit available to you.