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For the first time in a decade, the national average credit score in the U.S. dropped in late 2023, according to data from Fair Isaac Corp. FICO. But what exactly is a credit score — and how do you know if you have a good one?
A credit score is a number ranging from 300 to 850 that indicates to lenders how likely you are to pay back your loans on time. It affects what kinds of loans you can get and what interest rates you are charged.
There are three big companies that track and report activity on your loans: Experian UK:EXPN, Equifax EFX and TransUnion TRU. These credit bureaus look at information like payment history and credit usage on accounts such as credit cards, mortgages, car loans and other loans to calculate your credit score.
Credit bureaus use a variety of mathematical models to come up with your score. The most widely used credit-scoring model is FICO, created in 1989. Another popular scoring model is VantageScore, introduced in 2006. The credit bureaus each use slightly different data and formulas, so you may have a different FICO or VantageScore credit score from each one.
What is a good credit score?
The average credit score in the U.S. is 717, according to FICO, and what’s considered a good score is broadly 700 or higher.Scores are grouped into tiers: poor, fair, good, very good and exceptional.
In general, your credit score benefits if you have a lot of available credit but don’t use it, and if you make loan payments on time. On the other hand, if you use a lot of the credit available to you and don’t make payments on time, your score takes a hit.
Bottom line: The higher your score, the more credit you qualify for and the lower the interest rates you’ll be offered, which makes the cost of borrowing money cheaper. You might also get better rates on things like car insurance and home insurance and have an easier time getting approval from landlords, who will often run a credit check.
How does having a good credit score save you money?
Let’s take the example of a $300,000 home loan. The average interest rate for someone with a score of 620 is now 8.162%, so their monthly payment on a 30-year mortgage would be $2,235, according to FICO’s loan calculator, which uses current rates. Over those 30 years, that person would pay $504,700 in interest. Meanwhile, for a person with a credit score above 700, the average interest rate is now 6.795%. That’s less than 2 percentage points lower than in the previous example, but the savings are substantial: This person’s monthly payment would be $1,955 and their interest payments over 30 years would total $403,700.
Here’s another example, using a $40,000 car loan. The average rate on a 60-month loan for someone with a credit score of 500 is currently 17.574%, which would make their monthly payment $1,000 and the total interest paid on the loan $20,400. Meanwhile, the rate for someone with a credit score above 720 is 7.509%, making their monthly payment $800 and the total interest paid on the loan $8,100, according to FICO’s calculator.
Do I have a good credit score?
Credit scores are grouped into tiers. Here’s how FICO describes them:
How can I improve my credit score?
Now that you know how you can benefit from a higher credit score, here are some tips for improving yours:
Always pay your bills on time. Your payment history is the most important part, accounting for 35% of your FICO score.
Use less of your available credit. The percentage of available credit you’re using is called your credit-utilization ratio, and it accounts for about 30% of your score. Even if you qualify for a high credit limit — for instance, on your credit card — keeping the balance relatively low improves your score, as it shows you are not financially overextended. People with a “very good” score have a utilization rate around 15%, and those with an “exceptional” score keep it around 7%. One tip from Equifax: “Making payments toward a large debt multiple times in one month may be beneficial to your credit scores by helping you reduce your credit-utilization rate.”
Keep your oldest line of credit active. The credit bureaus also consider the length of your credit history, which makes up about 15% of your score. Your oldest line of credit, which for many people is a credit card, increases the average age of your accounts. The average length of time that people with FICO scores of 800 or higher have an open account is 128 months, or about 10.5 years, according to a 2016 FICO blog post.
Apply for a new line of credit only if you need it. Hard credit checks that are required for new loans and credit cards decrease your score. New credit accounts make up about 10% of your FICO score. Signing up for a store card to get a discount or rewards may seem attractive, for example, but the credit check will lower your score, and many store cards have high interest rates.
Aim for a diverse mix of credit. The remaining 10% of your FICO score is based on your mix of loans. The bureaus look at two main loan categories: revolving credit (lines of credit that have some flexibility in how they’re paid, such as credit cards) and installment credit (loans that require a fixed payment each month, like home and auto loans). That doesn’t mean you should take out different loans and pay interest on all of them in order to boost your credit score. However, if you do have a variety of loans —like a mortgage, credit cards and a car loan — that you pay on time, this is viewed favorably. And don’t worry — “it’s not necessary to have one of each” in order to have a good score, according to FICO.
