What Credit Score Should You Have?

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.

A person's FICO score is provided to lenders by the three major credit reporting agencies—Experian, TransUnion, and Equifax—to help lenders evaluate the risks of extending credit or loaning money to people.

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 having and maintaining lines of credit. 
  • An important metric used in calculating a credit score is payment history on open lines of credit. 
  • A credit score deemed "very good" or "exceptional" by FICO may range from 740 or higher.
  • A good credit score helps you get better interest rates on credit cards and loans, an increased likelihood of loan approvals, obtaining an apartment for rent, and a job, as well as better car insurance rates.

How a Credit Score Impacts Loans

A person's credit score affects their ability to qualify for different types of credit and varying interest rates. A person with a high credit score may qualify for a 30-year fixed-rate mortgage with a 3.8% annual percentage rate (APR). On 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, may pay 5.39% on the loan, with a corresponding monthly payment of $1,683. That's an additional $285 per month, or $102,600 over the life of the mortgage, for the person with a lower credit score.

The importance of having a strong credit score isn't limited to just mortgages. For instance, if you have a good to excellent credit score, you are far more likely to qualify for the best rewards credit cards.

Earning a Good Credit Score

Unfortunately, we don't start with a clean slate as far as credit scores are concerned. Individuals have to earn their good numbers, and it takes time. Even when all other factors remain the same, a person who is younger will likely have a lower credit score than an older person. That's because the length of credit history accounts for 15% of the credit score.

Young people can be at a disadvantage simply because they do not have the depth or length of credit history as older consumers.

Factors That Affect Credit Scores

Five factors are included and weighted to calculate a person's FICO credit score:

  • 35%: Payment history
  • 30%: Amounts owed
  • 15%: Length of credit history
  • 10%: New credit and recently opened accounts
  • 10%: Types of credit in use
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It is important to note that FICO scores do not take age into consideration, but they do weigh the length of credit history. Even though younger people may be at a disadvantage, it is possible for people with short histories to get favorable scores depending on the rest of the credit report. Newer accounts, for example, will lower the average account age, which in turn could lower the credit score.

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

Factors Not Included in a Credit Score

There is certain personal information that is not factored into an individual's credit score. These include an individual's age, ethnicity, and gender. Financial-related information that is not part of a credit score is a person's salary, job, and employment history.

Where a person lives and their family life, such as marital status or number of children also do not factor into a credit score. Additionally, soft credit inquiries, such as when you check your credit report or other companies do for promotional offers, do not affect your credit score.

Average Credit Scores by Age

FICO scores range from a low of 300 to a high of 850—a perfect credit score which is achieved by only 1.6% of consumers. Generally, a very good credit score is one that is 740 or higher.

This score will qualify a person for the best interest rates possible on a mortgage and the most favorable terms on other lines of credit. If scores fall between 580 and 740, financing for certain loans can often be secured, but with interest rates rising as the credit scores fall. People with credit scores below 580 may have trouble finding any type of legitimate credit.

Based on data compiled by Credit Karma, there is a correlation between age and average credit scores, with scores rising along with age. According to their data, the average credit score by age is as follows:

Keep in mind, these are averages based on a limited sampling of data, and many individuals' credit scores will be above or below these averages for a variety of reasons.

A twenty-something, for example, could have a credit score above 800 by making careful credit decisions and paying bills on time. Likewise, a person in their 50s could have a very low credit score because they took on too much debt and made late payments. Whether younger or older, anyone struggling to escape a dismal credit score ought to consider reaching out to one of the best credit repair agencies for assistance.

Benefits of a Good Credit Score

Having a good credit score not only allows you to get good interest rates on credit cards and mortgages as well as an increased likelihood of having your loan approved, but comes with many other benefits.

A good credit score allows for high credit limits, such as on a credit card. It also increases your chances of renting an apartment and landing a job. A good credit score also helps you get better car insurance rates. A good credit score also benefits your ability to get utilities without having to put down a security deposit, the same as when getting a cell phone.

How to Improve Your Credit Score

Improving your credit score comes down to managing your finances well. Paying bills on time may be one of the most crucial aspects of maintaining a good credit score. Missed or late payments significantly damage it.

Vantage, another type of credit score, used to use a different score range from FICO but now uses the same range of 300 to 850.

Having well-balanced credit is also important. Keep your credit card balances well below their limits. Opening up a lot of credit cards in a short time also dings your score. A good tip to keeping your score high or increasing it is by keeping old accounts open. As long as there is no adverse effect by keeping your old accounts open, having that longer credit history helps improve your score.

Lastly, periodically check your credit report. Noticing any inaccuracies and then disputing them can help keep your credit history up-to-date and accurate and your credit score strong.

What Is the Difference Between a FICO Credit Score and a Vantage Credit Score?

FICO credit scores and Vantage credit scores are the two main credit scores used in the U.S. FICO is the industry leader while Vantage has been gaining traction over the years. Both are credit scores that different entities can use to assess an individual's credit history. The differences between the two are primarily the model and the factor weightings to arrive at the score.

What Is a Decent Credit Score to Buy a Car?

A decent credit score to buy a car is 661 or higher. This score allows individuals to get good rates on car loans. You can buy a car with a lower credit score, but approval will be more difficult and if you are approved, you will have to pay a higher interest rate.

What Is the Fastest Way to Build Credit?

The fastest way to build credit is to take on credit. Opening up a credit card or getting your name on another individual's credit card, such as a parent, is a good starting point to build credit history. From there, paying your bills on time and consistently checking your credit report for inaccuracies will allow you to build a good credit history.

The Bottom Line

The Experian National Credit Index study helps explain how the behavior of certain age groups can affect average credit scores. The study found that people in the 18–39 age group had the greatest number of late payments during the previous 12 months, the 40–59 age group held the greatest amount of debt, and the 60+ age group had the lowest average credit utilization (used the least amount of credit that was available to them).

Though it is not unheard of for a young person to have a stellar credit score, more commonly these ratings rise as people acquire credit, make careful credit decisions, pay bills on time, and gain depth and length in their credit histories.

Article Sources

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  1. myFICO. “What Is a Credit Score?

  2. myFICO. “What's in my FICO® Scores?

  3. CNBC. "1.6% of Americans Have a Perfect 850 Credit Score, but Here's the Only One That Matters, According to Experts."

  4. Credit Infocenter. “How Does Your Credit Score Compare to Other Americans?

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