How does your credit score compare with the average American's?

ByJames Dennin

Congrats America, all your hard work has been paying off. The average credit score in the country hit 700 in April, according to new data from Fair, Isaac, creator of the widely used FICO score, the Wall Street Journal reports. That's the highest since 2005, when FICO began tracking the data. 

The report pointed to other signs of improving financial health in the United States: The share of Americans with credit scores below 600 fell to a new low of 40 million, or about 20% of people with FICO scores. That's down from more than 25% in 2010. Plus, data from 2016 suggests about a fifth of borrowers have credit scores above 800, a proportion that's been inching up for years.

Why the rise in credit scores? Americans are continuing to bounce back from the Great Recession and the damage it did to their credit as a result of foreclosures and bankruptcies, the Journal reported.

The upsides of a high credit score

So why should you care about improving your score? A higher number makes it easier to secure new lines of credit, from a mortgage to a new credit card. It can also lower the interest rate you pay on loans. As for the bigger picture, economists also told the Journal that if more Americans have an easier time getting loans, they will spend more and help stimulate the economy.  

About 90% of major lenders use FICO scores along with other borrower data, although there are dozens of different types of scores, which vary slightly in how they assess people's credit worthiness. Personal bankruptcies can affect your credit score for up to 10 years, while mortgage foreclosures are on your report for up to seven years. 

What's a "good" credit score?

FICO scores range from between 300 and 850, with 850 being a perfect score, and are based on five criteria: your payment history, your debt, what types of loans you've taken out, the length of your credit history and your new accounts. VantageScores, a less common alternative to the FICO, range from 501 to 990 and are mostly associated with the riskiest types of borrowers. 

Your credit score is considered "excellent" if it is 750 or higher, "good" if it is between 700 and 749 and "fair" if it is between 650 and 699. Anything lower than that is either "poor" or "bad." 

By far the biggest determiner of your credit score is your payment history. When you pay your credit card bill on time, or make a student loan payment on time, your servicer reports those transactions to the three major credit bureaus, Experian, TransUnion and Equifax, all three of which use FICO scores.

Other considerations include what percentage of your available credit you use, what kind of loans you have and the number of credit cards you have. Paying off your credit card twice a month can help keep your utilization ratio low — which also helps improve your score.

Expect another bump this summer

In addition to bankruptcies aging off people's credit reports, credit scores could rise even more thanks to new rules on how they are calculated. In March, the three credit bureaus announced that about 12 million people would get an automatic bump on their credit score thanks to a series of reforms. Starting July 1, tax liens and civil judgments will no longer lower your score. 

Improving your credit score can lead to tens of thousands of dollars in savings over a lifetime, thanks to reduced interest rates. To get your credit score up, experts recommend automating all your payments, since payment history makes up roughly a third of your overall score, and keeping utilization as low as possible. 

You should also apply for new lines of credit sparingly and monitor your credit report for mistakes — about 40 million Americans have errors on their report, according to one study, some of whom would see savings if they called the bureau and made the fix. To check for errors, you can request one free credit report per year from each of the major firms. 

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