Credit scores are one of the most important pieces of information in personal finance. If you want to buy a house, buy a car or open a bank account, you’ll need a good credit score. Even in a world of declining interest rates, low volatility, and seemingly insignificant increases in the yield of the U.S. 10-Year Treasury, an increase in credit score is required to qualify for that higher rate.
Credit Score Basics
Credit scores are used by lenders to evaluate a borrower’s ability to pay back a loan. The rating is based on a numerical value which indicates the likelihood that a borrower will repay their debt. According to the Federal Reserve’s Open Market Committee’s most recent “Primary Credit Accordions” report, as of July 2017:
“As of July 2021, 90-day past due (or 12-month past due) credit card delinquencies were at 0.96%, down from 0.99% the prior month and 1.01% a year earlier. Prime credit card delinquencies were at 0.95%, down from 1.03% the prior month but up from 0.92% a year earlier. Other prime credit delinquencies were at 0.78%, down from 0.80% the prior month but up from 0.72% a year earlier. Other subprime credit card delinquencies were at 1.11%, down from 1.20% the prior month but up from 1.04% a year earlier.”
In layman’s terms, this means that the percentage of people who are more than 12 months past due on their credit card debt is at historic lows. Based on these data, it would be difficult to determine how this information has affected our financial lives, but we can explore some of the changes.
Credit Scores Over Time
At the very least, let’s start with a generalization that every one of us probably believes: that everything changes over time. In other words, credit scores become better as the economy improves and people get jobs, and worse as the economy hits a rough patch. Well, credit scores may not change over time in a literal sense. But what happens is that the credit scores that lenders have are an average of hundreds of thousands of data points.
This includes things such as how long the borrower has had their credit score, what other credit they have, as well as new loans that have been issued. So, when the economy suffers a downturn, as we are currently experiencing, it could theoretically lead to a decline in how good a credit score someone has, even if their overall credit rating hasn’t changed much. It’s important to note that the FICO score, which is the most widely used scoring system in the United States, is based on over 620 variables.
FICO Scores and Ability to Pay
The interest rate and length of the loan depend heavily on the credit score. If you have a credit score of 780 or higher, then your credit score should enable you to qualify for any loan you qualify for. So, when we say a “good credit score,” it means a credit score above the median, which is a FICO score of 620.
That means that half of the people have a score of 620 and a half people have a score of 620. By itself, the median FICO score in the United States is about 649, which means that 43% of people have a score of 620 and 53% have a score of 651 or higher. If we are being honest, there is a difference between a good and a great credit score.
Credit Scores Have Grown
We know that credit scores are starting to improve, which is great news for prospective home buyers. While the report above seems encouraging, one stat jumps out in particular:
“The nation’s credit card delinquency rate fell to 1.04% in July, the lowest rate in 12 years, according to the Federal Reserve. The share of outstanding credit card debt is now just 18.2%, a level not seen since February 2021.”
That’s great news! However, as previously noted, this increase is due to a small base. The credit scores of only a small percentage of the country have improved. In other words, while the improvement is happening, the majority of Americans haven’t seen any improvement in their credit scores in years.
If you’re a home buyer or looking to get a loan for a car, you may not have noticed much improvement in your credit score in the past few years. If you’ve been receiving poor credit card offers or the offers aren’t clearing your credit reports, you have probably seen your score drop in the last year.
Even if you did see an improvement in your score, lenders now require higher credit scores to qualify for a loan. The median credit score for homebuyers in the U.S. is now 716, up from 705 in the second quarter of 2021.
How Do We Know If Our Credit Score Is Affected?
If you’ve noticed your score creep up, but you still have the same credit card debt, what can you do to improve it? The answer to that question depends on your situation. If you have a credit card with a low balance, you’re likely to suffer the consequences. If you’ve been paying your credit card bill on time, that shouldn’t be the case. If you’re carrying a high balance on your credit cards and you haven’t been able to pay it off, then there’s a chance your credit score has gone down in the past year. You might have fallen victim to a credit card company’s refinancing scam. This tactic makes it look like you’ve paid off your balance by making a “low balance payment.” However, this doesn’t happen automatically and your card issuer just charges you a higher balance at the beginning of the month. In short, you’re paying more in interest.
If you know someone who has seen a dramatic rise in their credit score in the past year, you might be able to use this to your advantage. Use this increase in credit score as an opportunity to put more money toward your credit card debt. Or if you’re struggling to pay off your cards, use the new credit score as an opportunity to make changes to your spending. This could even mean putting more money toward your emergency fund. The key to a stable credit score is to pay your bills on time and maintain low-balance accounts on your cards. It is unlikely that your credit score will rise drastically, but you can improve your credit and take steps to keep it in good shape.
How do Credit Scores Vary by Credit Card Type?
For instance, based on the FICO score, you’d expect that someone with a credit card with a credit line of $1,000 could qualify for a 3% APR loan. But with a lower credit score, the situation might be quite different. The median FICO score for a credit card is 616, which means that a person with a credit card with a credit line of $1,000 might only be able to get a 2.99% APR loan. If you are in the good credit score range, then chances are that you can get a decent loan. However, if you are the below the median range, then you may be in trouble.
What Is the Worst Possible Credit Score?
The worst possible credit score for someone in a certain credit range is 600. However, there are also several other ranges you can be in, depending on your credit profile and various other factors. If you’re under the median FICO score, then it’s a pretty safe bet that your score could go down for a variety of reasons. It could be that you got laid off or lost your job. It could also be that you didn’t pay down debt that you were aware of, making it look as though your score is lower than it is.
Some other factors that could influence your credit score could be your credit utilization ratio, loan payment history, and the age of your credit accounts. If you do have a credit score in the range that you want, then there are a couple of things that you can do to maximize your ability to get a good loan at the best possible rate.
How to improve your credit score?
The first thing that you can do is to make sure that you are using your credit correctly. If you’ve never had credit before, then you may not realize that having too many credit cards can hurt your credit score. For instance, having a credit card with a 0% balance transfer offer on it doesn’t help your credit score much, since most lenders require you to have a certain credit score to qualify for a 0% balance transfer.
A better way to make sure that you are using your credit efficiently is to make sure that you are paying down the balance of your credit cards every month, using less than 30% of your credit limit, and not having any credit card balances at all. Just as a reminder, you can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. For example, the median FICO score for the United States is 649, and the average FICO score is 704.
- Pay down your debt. You will need a good credit score to get a mortgage or to get a business loan.
- Pay your bills on time. The longer that you are paying your bills on time, the better your credit score will be.
- Keep your credit utilization under 30%. This number can be seen on your credit report.
Not everyone needs a good credit score. If you are looking for a mortgage or a business loan, you may not want to aim for the high end of your credit score. However, if you are simply looking to refinance your existing mortgage or take out a new loan, you may want to consider a score of around 800 or higher.
A credit score of 800 is still considered fair and up to date. But keep in mind that the higher your score is, the lower the interest rate that a lender may charge you. Therefore, you may be better off looking for a lower interest rate rather than a high credit score.
Credit Maintained But Losing Place
Your credit score is critical to your financial future. If you have a good credit score, then you will be in a better position to get good. Consider the scenario that you can get a better mortgage rate or business loan at 4%. But if you have a credit score of 675, you may have a hard time getting a loan at even 4%.
So, you can see that a lot is riding on your credit score. And as we can see, things can change quite quickly if you get an undesirable mark on your credit report. While the average credit score is 678, some sub-sectors of the credit industry have much lower credit scores. But this doesn’t mean that your credit score is not good enough. You need to be able to have good credit for just about anything.
Credit scores are powerful tools for the financial industry. There is no doubt about it. They can help you to get a new job, get a lower interest rate on a loan, or even save you a few bucks at the supermarket. A good credit score is a necessity if you are looking to purchase a home, get a student loan, get a mortgage, or finance business investment.
If you are in the market for a credit score, then you can be confident that you will get the best possible information about a credit score from MoneyTips. However, if you want to keep track of your credit score, then you might want to check out Credit Manager. By following our simple tips, you can get your credit score within minutes and avoid paying an expensive company.
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