The Good, the Bad and the Ugly
Credit scores generally range between the low 300s and the mid-800s, so surely a score of 600 is a good credit score, right?
Actually, a score of 600 is a poor credit score. Your credit score directly affects how much money your loans and other types of financing will cost you over your lifetime. Let's take a look at the breakdown of credit scores:
Excellent credit score: 720 and Up
Credit scores in this range will open up the best interest rates and repayment terms for loans. If you want to make major purchases, such as an investment property, this credit score range is where you want to be.
Good credit score: 680 to 719
A credit report score in the 680-and-up range is good news for you. You can still get decent terms from lenders, although not as nice as those offered to borrowers with truly excellent credit scores. If you're shopping for a first home, a score in this range is certainly considered to be a good credit score, and it will get you an acceptable mortgage. You'll likely also be able to refinance your mortgage for better terms on an existing payment structure.
Average credit score: 620 to 679
This is the absolute minimum credit score you can carry and still get fair mortgage terms. Smaller-ticket items that require financing are doable in this range, which is several notches below a good credit score. However, you'll be better served by reviewing your credit history report and taking steps to improve your credit score.
Poor credit score: 580 to 619
Although you won't necessarily have any problems getting loans with a credit report score in the high-500 to low-600 range, you'll get those loans on lenders' terms. Be ready for higher interest rates, and expect finance charges that will hit you right in the wallet. The good news is that you can build your credit score from here by monitoring your credit reports and by being responsible with your finances. Note that this range is also the lowest workable credit score range if you're shopping for auto financing.
Bad credit score: 500 to 579
If your credit falls somewhere in this credit score range, financing terms will cost you big-time. For long-term loans, such as a 30-year mortgage, expect to see interest rates that are at least three percent higher than interest rates awarded to borrowers with good credit. For shorter-term loans, like a 36-month auto loan, the effects of your bad credit score are even more pronounced. Expect interest rates almost double those offered to consumers with good credit scores.
Miserable credit score: Less than 500
At this point, your credit score is so bad that getting any type of financing is almost impossible. If you can get loans, they'll carry nearly punitive interest rates. If your credit report score is below 500, it's time for action. Get a copy of your credit history report, and make an appointment with a credit counselor.
The Relationship Between Credit Scores and Age
Have you heard the phrase, "some things get better with age?" It references the sentiment that life experiences, patience, and wisdom help improve your life's adventures. This saying can also be applied to credit scores.
Although it is certainly possible for a younger person to attain a higher credit score, older people do have an advantage.
How Does Age Influence Your Credit Score?
To calculate your FICO score, there a few factors that are considered, including:
- Past payment history
- Outstanding debt
- Length of credit history (credit age)
- Recent credit applications
- Your installment and revolving credit balances
With these factors building your score, it is an advantage to have a longer credit age and payment history, since these two factors combined comprise 50 percent of a credit score.
Older borrowers have an advantage in maintaining a higher credit score not only because of the ability to have a more extensive payment history and older credit age, but also because they have had more time to clear negative debt or marks from their credit report if they had a less than spotless payment history.
Credit Scores by Age Group
According to BCSAlliance, various credit scores typically follow certain age groups:
- The 18 - 29 age group has an average credit score of 637.
- The 30 - 39 age group has an average score of 654.
- The 40 - 49 age group has an average score of 675.
- The 50 - 59 age group has an average score of 697.
- The 60 - 69 age group has an average score of 722.
- The 70 plus age group has an average score of 747.
As noted above, the older the age group, the better the average credit score.
There's More to Your Credit Score than Age
Although the above figures definitely support the fact that your credit score can be affected by your age, it is important to remember that there are many contributing factors to obtaining a higher credit score.
No matter your age, in order to obtain and maintain a higher credit score, you need to monitor your use of credit. In addition to the age of your credit history, there are four other factors that can affect your credit score, including:
- Past delinquencies:
A history of missing payments or defaulting on loans is a strong indicator that you will fail to pay in the future.
- Use of Available Credit:
If you are close to the limit (or maxed out) on a credit card, lenders view this as a higher risk than if you only used a small portion of the available credit.
- Credit inquiries:
It is viewed as a negative factor if your credit history shows numerous requests for credit in a short amount of time.
- Mix of credit:
Secured credit cards are a great way to build your credit history; however, if you only have secured credit cards or secured loans, you may be seen in a less favorable light than if you have a mix of installment and revolving loans.
No matter your age, your credit score depends on how responsible you are. When building your credit history, don't focus on the factors you cannot change – like your age – instead make your payments on time and use your credit wisely.
Credit Scores vs. FICO VantageScores: The Differences Explained
In the not-so-distant past, how lenders determined your creditworthiness was shrouded in mystery. Even with the majority of the veil now pulled aside, it's probably reasonable to assume that a fair number of consumers receive no formal or informal education on the finer points of personal finance. Money management is generally something you learn as you grow through life. In your teen years, you establish bank accounts. Then you buy a car. Then you buy a home. Along that path, you learn the general mechanics of credit and how it works. But do you know the difference between a credit score, a FICO score and a VantageScore and how lenders use those numbers?
Credit Score Defined
A credit score is a number arrived at in a variety of methodologies and formulas that allows lenders to assess you as a credit risk. Even today there is no particular recognized standard in credit scoring. A FICO score is a credit score. A VantageScore is a credit score. Lenders might also have their own method for determining credit scores.
Why is your credit score so important? Your credit score is with you for life. The higher your credit score, the lower you are as a credit risk. This affects whether you can borrow money, how much you can borrow, the terms of a loan and how much it will cost you in finance charges.
FICO Score Defined
Fair Isaac Corporation (FICO) was founded in 1956. They created the FICO score as a means to evaluate creditworthiness. Prior to 1956 and until the 1980s, lenders used their personal judgment in determining who was able to borrow money. FICO developed the first credit scoring system generated on a score between 300 and 850 based on credit history and sold the credit scores to lenders. It proved to be a lucrative venture.
In the 1980s, FICO built custom software to automate the process. At that point, the three main credit reporting agencies (Equifax, TransUnion and Experian) adopted the FICO score as a loose standard. Due most likely to its longevity, the FICO score still holds its place as the dominant credit scoring agency.
The "Big 3" credit reporting agencies, Equifax, TransUnion and Experian, eventually got together and decided that it was time that FICO share the wealth. With the market now open to making credit scores available to consumers as well as lenders, the credit bureaus wanted their slice of the pie. They began marketing VantageScore in 2006. VantageScore is also based on a range of numbers, although those numbers differ somewhat from FICO in that the range is from 502 to 999.
The War for Credit Scores
FICO filed antitrust, false advertising and breach of contract claims against the Big 3 in 2006 to prevent VantageScore from the use of the range of numbers that overlapped with the FICO scoring system. After a four-year court battle, a jury rendered a verdict that a credit score range could not be trademarked. In July 2010, a U.S. District Court Judge dismissed all of FICO's legal claims, thereby ending the litigation.
The Aftermath for Consumer Lending
It might appear that the outcome of the litigation between FICO and the credit bureaus only complicated matters. However, that is not the case. Request your FICO score and your VantageScore. If you need to borrow money, your best bet is to simply research your lender options. If your FICO score is stronger, look for a lender that uses FICO credit scoring. If your VantageScore is stronger, seek out a lender that uses the VantageScore credit score range. And don't forget to take into account that some lenders use their own credit score. The effort you expend in collecting the information on your credit scores and researching lenders will pay off in better loan terms and lower interest rates for you.
Factors That Damage Your Credit Score
You know how to get your credit scores for free, but you may not know the different factors that can damage your credit score. This information is at least as valuable as getting your credit scores free because if you don't know what can hurt your credit score, even free credit scores won't do you much good.
Here are some factors that can damage your credit score:
- Maxed-out credit cards
Maxing out your credit cards is a huge red flag to the credit bureaus and lenders because, from their perspective, you've dug a large and expensive hole of debt. This drastically increases your risk of defaulting on these lines of credit in their view, and it definitely damages your credit scores.
- Bad debt-to-credit ratio
Directly related to maxed-out credit cards, your debt-to-credit ratio measures your total balance from all of your lines of credit against your overall credit limit. The more of your available credit limit you use or the higher your debt load, the lower your credit score will be. Try to keep the ratio on each line of credit at 50 percent or less.
- Home foreclosures
Having your home foreclosed means that, for one reason or another, you've been unable to meet your obligations on what is probably your largest credit line. Foreclosures are among the biggest of red flags to creditors.
- Paying late
When you pay your bills represents 35 percent (the single largest factor) of how the credit bureaus calculate your credit scores. Paying your bills on time every time can do wonders for your credit scores. Conversely, paying your bills late can inflict serious damages on your credit scores. This, more than anything, illustrates the importance of paying your bills on time.
- Blowing off your bills entirely
Every one of us is tempted now and then to blow everything off and live on a deserted island with no worries except for high tide and sunblock. Very few of us do it, but if you do, you'd better be prepared for a tsunami of unhappy lenders and a long peeling-back of burnt-to-a-crisp credit scores for up to seven years. (And this metaphor abuse doesn't even come close to the financial wrath you'll face.)
- Collection notices
Collection notices are a creditor's last chance to collect on what you owe them. It's the equivalent of them throwing up their hands in disgust and indicates that they're so desperate to get something — anything — from your account that they've contacted a collection agency so they can get at least a percentage back. This is very bad for credit score; very bad.
Bankruptcies are horrible for anyone's credit scores. They are proof-positive that you've accumulated a lot of debt but are unable to arrange with your lenders to pay it back. Although it can be necessary, a bankruptcy will remain on your credit reports for ten years for any and all credit issuers to see — and they won't look kindly on it.
- Closing old accounts
Why not close the account of an old retail or bank credit card that you haven't used in ages? You may want to think twice about doing so, because even though you don't use it, that card can still help your debt-to-credit ratio by increasing your available credit limit.