Credit scores dominate spending and decisions, but few people know the ins and outs of this looming figure.
FICO created the first credit score model in 1989, and it is known today as the most widely used and accepted credit score. While FICO provides the algorithm for the credit score, the three major credit bureaus — Equifax, Experian and TransUnion — provide data for credit reports.
Rod Griffin, senior director of consumer education and advocacy at Experian, suggests creating a plan before opening a line of credit.
“Credit is a financial tool, debt can be a financial problem,” Griffin says.
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What is considered a good credit score?
According to Experian, about 67% of Americans have a FICO credit score of 670 and above, ranking them “good,” “very good” or “exceptional.”
740-799: Very Good
While these numbers serve as a baseline, those in the business of credit feel the answer is not so simple.
“Scores of 750 or greater are going to be considered high prime, or very good, and you'll probably qualify for the best terms and rates,” Griffin says. “When your scores dip below 680 or so, they start to fall into a subprime category, meaning you may not qualify, and if you do, you're going to have to pay much higher interest rates.”
Credit score is based on a number of factors. Payment history is one of the biggest components — making payments on time can help your score, while missing payments or filing bankruptcy hurts your score. Recently opened accounts, applying for new accounts and how old your accounts are can impact your credit score. Experian also writes that “credit mix,” or managing installment accounts (car loans and mortgages) and revolving accounts (lines of credit) could positively impact credit scores by showing responsibility.
When lenders check your credit for loans, mortgages or credit cards, they have different risk tolerances.
“The score used for car loans will weigh information a bit differently than a score that's developed to predict the risk that you'll repay your mortgage as agreed,” Griffin says. “Two lenders use exactly the same score, one might say that a one score is acceptable, and another might require a better score.”
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What is a good credit score by age?
There isn’t necessarily a “good” credit score to have at one age or another — a good score is a good score. But while age isn’t used to calculate credit scores, data shows that averages trend upward as credit holders get older.
According to American Express, this is because older people have simply had more time to establish credit. With an older individual, there’s a lengthier account history, more payments to consistently pay on time and often a larger income. Young people checking their credit score might be surprised by a low number, but it doesn’t necessarily mean they’ve done something wrong.
“They have very little credit history, what we call a thin credit file, or they may have no credit history at all, and so there's nothing to base a score on or use to calculate a score,” Griffin says.
The averages aren’t a one-size-fits-all statistic, but there does seem to be a correlation between age and credit score.
Here are the average FICO scores by age from 2019, according to American Express:
Age 20-29: 662
Age 30-39: 673
Age 40-49: 684
Age 50-59: 706
Age 60+: 749
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How do you check your credit score?
You can get a free credit report on AnnualCreditReport.com from each of the three credit reporting agencies. But while these credit reports include identification history and personal credit information, they don’t include credit scores.
According to the Federal Trade Commission, you might be able to get a free credit score from a credit bureau or by signing up for a bureau’s credit monitoring system.
“Don't be afraid to check your credit report, it doesn't affect your credit score,” Griffin says. “If you don’t look at the report, you don’t know what’s in it. You can’t do anything about it.”
What is the difference between a credit score and credit report?
Credit reports include information about how you use your credit and the financial resources available to you. Credit scores are tools used by lenders to analyze that information.
Griffin uses this analogy: In school, a term paper is like a credit report. Your grade on that paper is the credit score, and the bank is the teacher, reviewing and assigning the grade.
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How do you improve your credit score?
Factors that may contribute to a bad credit score include late payments of more than 30 days and utilization rate. Utilization rate is the amount you owe divided by your credit limit. A low rate is often a good sign because it means you’re using less of your available credit and keeping track of it by not overspending.
The easiest way to improve your credit score is to know and address risk factors and stay on top of payments.
“If you can pay down your credit card balances, you're going to see improvement in your credit scores,” Griffin says.
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This article originally appeared on USA TODAY: What is considered good credit? How to check your score.