While it is still a bit too early to know how much the COVID-19 pandemic will ultimately affect credit scores, it is always best to be in the know about what may impact your score in the future.
That way, regardless of how you have been personally impacted, you will know what to do if your credit alarm bells start ringing.
What is the average credit score in America?
As of July 2020, the average FICO score reached an all-time high of 711, which is a five-point increase over last year. And just this month, the credit bureau Experian released its State of Credit Report showing an average VantageScore of 688, a six-point increase from this time last year.
What is considered an ‘average’ credit score?
The words “fair” and “average” are sometimes taken to mean the same thing. But it is important to know that in credit-scoring terms, fair and average are very different. Based on the numbers shown above, the average American has what would be termed “good” credit, which ranges from 670 to 739 in the FICO score model and 661 to 780 in the VantageScore model. This is better than “fair” credit, which checks in at 580 to 669 for FICO and 601 to 660 for VantageScore.
It’s helpful here to talk about how “fair” and “average” are really two different measures in credit scoring, even though both have numerical functions. “Average” in this instance is a mathematical term, also known as “arithmetic mean.” In other words: add up all individual credit scores and then divide the sum by the total number of those individuals.
The word “fair,” as outlined in the ranges above, is actually the next-to-the-last category above “poor.” It is important to know that the difference in credit scoring between “fair” and “good” is actually pretty substantial in terms of what one score will cost you to get a loan or to access credit versus the other.
Why is your credit score important?
Your credit score is used to determine more than just the interest rate and terms, such as down payment or size of credit line, for which you may qualify (although it will most certainly be used for that purpose). Here the difference between fair and good is a big one, even though the numbers back into each other.
Yes, being short just one point can put you in a lower and more expensive category. Credit scores, and the reports that create those scores, are increasingly used by insurance companies, landlords and even employers (though employers only use credit reports, not scores). This means your credit report or the score generated from it is likely to factor in to the insurance rate you are charged, your acceptance for a new place to rent or lease or even a promotion at your job.
And when it comes to new loans, getting to the next tier—or worse, falling into the lower one—is likely to mean real dollars, either up or down. What you always want to be here is up. So, finding out where you stand is crucial for the next step.
How to improve your credit score
Check your credit report
The first step in this next process is accessing your credit reports and scores. Lenders are not required to report to all three of the credit bureaus, so checking your credit report from just one bureau isn’t good enough.
The information that Equifax has may be slightly different from the information that Experian has, and the information that Experian has may be slightly different from the information that TransUnion has. Also, you can have a perfectly clean report with one bureau while another report contains some negative items in error.
You can pull your free reports at AnnualCreditReport.com. Federal law entitles every American to at least one free credit report from each of the three bureaus every 12 months. You’re also entitled to an additional free report from each of the bureaus if you:
- Were denied credit in the last 60 days from the credit bureau used by the lender
- Are unemployed and planning to seek employment in the next 60 days
- Are on welfare
- Are a victim of fraud or identity theft
Several states also provide for additional free credit reports each year. Check with your state’s attorney general to find out if you qualify.
Finally, from time to time, credit card issuers offer free peeks at your credit reports as do the bureaus themselves. During the current COVID-19 pandemic, the bureaus are allowing free credit reports weekly.
The annual credit report website does not offer free scores, so you may have to purchase that. However, there are several lenders and sites that offer free scores. Credit card companies, in particular, may offer free scores to their customers. This is not universal, so you will need to check with your lender to see if it is something they offer.
Review your credit reports carefully to be sure that the information listed is correct. The credit bureaus deal with billions of pieces of information and mistakes happen. It is up to you as the consumer to correct any you find. While this may seem tedious and time-consuming, it is worth your time.
Once you have reviewed your credit report and made any corrections, it is time to order a score. If your score isn’t where you want it to be, look at the factors that are bringing it down. When you receive your score, you will also receive what are known as “reason statements.” A reason statement is a simple explanation of why your score is less than perfect.
Pay your bills on time
If you have been late making payments, make today the day you commit to paying your bills on time, each and every time, from now on. This is the best thing for your score, and more importantly, for your financial health.
Reduce your card balances
If you have credit card debt, look at where your credit utilization numbers are. If you have cards on which you are using more than 25% of their credit lines, you need to work on bringing that number down. The people with the best credit scores see utilization rates in the single digits, so keep that in mind. I like 25% as the maximum at all times. Keeping these numbers low will pay off in higher scores, not to mention less worry on your part about how much you owe.
Use different types of credit
After that, you can work on your credit mix, which should include both revolving and installment credit. Credit cards are revolving, while car loans and mortgages are installment credit. Your credit score looks at how you handle both types of credit, which is why just having a fistful of credit cards won’t help you as much as a credit card or two and a mortgage or other installment loan.
Don’t apply for credit unless you need it
Just remember that when it comes to credit mix you need to be careful because of the impact of new credit. Lots of hard inquiries are bad for your score, especially if your report is thin or your score is low. This is why you should only apply for credit when you need it and when you are fairly certain you will qualify.
One difference is if you are shopping for a mortgage or car loan. These inquiries are usually made in a short period of time and will usually only count once.
Keep old accounts open
The last factor in credit scoring is your length of credit history. Alas, you have little control over this factor. Your accounts, like your age, can only be as old as they are. But everyone has to start somewhere.
Use credit building tools
Finally, there are some new products that can help you increase your score if you still aren’t where you would like to be.
- The Experian Boost program uses positive information gleaned from your bank account to report positive cellphone and other utility payments, which should effectively “boost” your score.
- For renters, the Experian RentBureau will also report rent payments, something else that is not typically reported.
- UltraFICO is a product that accesses your banking data to report positive payments to increase your score.
All of these products will only affect the score derived from your Experian report, but may still be worth looking into. Since they are consumer-driven, all are easy to opt in and out of.
Remember, by doing the right things when it comes to your credit you, too, can be in that group of Americans with an average or above (read “excellent”) credit score. Good luck!