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Simply put, a credit score is a statistical number that depicts a person's creditworthiness. While simple in concept, it is a number that can either really help you, or really hurt you when you apply for a loan or borrow money to make big purchases or down payments.
Whether you like it or not, your credit score is calculated the same way as everyone else’s. Your credit score is calculated on a variety of factors, and it doesn’t favor individuals who choose to live without lines of credit.
30% of Americans Have Poor or Bad Credit
While only a small percentage of Americans have terrible credit scores, a whopping 30% have poor or bad credit, according to the Consumer Financial Protection Bureau. Even worse, 45 million American consumers have no credit report or not enough credit history to create a credit score.
As many as 43% of millennials have bad credit, according to multiple sources. In fact, millennials and Generation X are more likely to have subprime credit, a credit rating given to those with less-than-perfect credit reports or short credit histories.
While every creditor defines its own ranges for credit scores (i.e. many lenders think anything over 720 is excellent), here is the average score range, according to Credit Sesame:
- Excellent: 750 and above
- Good: 700 to 749
- Fair: 650 to 699
- Poor: 550 to 649
- Bad: 550 and below
Almost 60% Don’t Know Their Credit Score
Nearly 60% of Americans don’t know their credit score. Some people are afraid to look at their scores, knowing they've made bad financial mistakes and others don't feel the need to check their scores until they are ready to apply for a new line of credit.
This is a mistake, especially with so many free credit reporting services available. Monitoring your credit report, especially when your credit score is low, can allow you to identify areas that are weighing down your score.
Credit Sesame, Credit Karma and Quizzle are all free credit monitoring services that can help consumers track their score and identify any derogatory marks on their report. Credit Sesame then grades each of the major factors of your score, including
- Payment history
- Credit usage
- Account age
- Account mix
- Credit inquiries
For example, if you have a "C" for payment history, then you know that your late payments are dropping your score, especially since payment history makes up 35% of your score. You can write a good faith letter to lenders to ask them to remove the mark off your report and continue to make on-time payments on all other accounts.
Shenil Walker, a Credit Sesame customer, didn’t check her credit report until a year after having a baby. It was then that she found she had six accounts in collection because the hospital never sent a bill. Walker knew she had to fix her credit score to qualify for better lines of credit and started researching how to do so, but she says, “I had no idea what my credit score was made up of prior to that.”
Walker is not alone. A survey found that 24.5% of its respondents did not know how impactful the credit utilization rate is on a credit score. It is crucial for consumers to know what their credit score is and which factors impact it the most to maintain a healthy credit report.
80% of American Households Have Debt
Debt is a common thing, and 80% of American households have debt. Another 70% of Americans said that their debt was a necessity in their life, even though they preferred to no have no debt at all.
Debt is a tricky matter to balance. Loans and credit cards can expand opportunities, or at least that is what 68% of Americans believe. On the other hand, if you aren’t careful with your debt to credit line ratio, your credit utilization rate will be higher, and your credit score will be lower. The total amount of debt owed counts for 30% of your score.
Chris Hall, a Credit Sesame customer, says that debt kept him from having a good credit score. “I got sucked into the loop of borrowing from one [line of credit] to pay the other, ruining my name,” says Hall. “In the end, no banks would even let me open an account.” Hall’s debt cycle started with medical debt he couldn’t afford. It wasn’t until he began tackling his debt that his credit score improved.
Can This Bill Increase Your Credit Score?
One proposed bill seeks to help consumers have better credit scores. The H.R.5282, also known as the Comprehensive Consumer Credit Reporting Reform Act of 2016 sponsored by Rep. Maxine Waters of California, would allow outdated information to be struck from consumer’s credit records. The H.R. 5282 would also allow consumers to fix errors on their reports without needing to show as much proof that is needed now. The goal behind the bill is to improve consumer credit to increase their chances of loan approval.
While this bill is still under consideration, there are other ways a consumer can improve their credit score.
- Pay your bills on time: Six months of on-time payments are required to see a noticeable difference in your score. Unfortunately, paying your phone and utility bills on time will not raise your credit score.
- Up your credit line: If you have credit card accounts, call and inquire about a credit increase. If your account is in good standing, you should be granted an increase in your credit limit. It is important not to spend this amount so that you have a lower credit utilization rate.
- Don’t close a credit card account: If you are not using a certain credit card, then it is best to cut it up and stop using it instead of closing the account. Depending on the age and credit limit of a card, it can hurt your credit score if you close the account.
For example, say you have $1,000 in debt and a $5,000 credit limit split between two cards evenly. As the account is, your credit utilization rate is 20%, which is good. However, closing one of the cards would put your credit utilization rate at 40%, which will negatively affect your score.
Your credit score is one number that can cost or save you a lot of money in your lifetime. An excellent score can land you low-interest rates, meaning you will pay less for any line of credit you take out. But its up to you, the borrower, to make sure your credit remains strong so you can have access to more opportunities to borrow if you need to. (See also: How One Woman Used Credit Sesame to Improve Her Credit Score)