What Is a Normal Credit Score?


In the United States, your credit score is one of the most important numbers associated with your identity. The score will determine whether or not you’ll be approved for loans or credit cards and how much interest you'll pay if you are approved. Understanding where your score ranks in comparison to other Americans can help you understand whether or not you need to make improvements.


Although credit reports have been around for quite some time, the credit scoring system in use today is more recent. Before it was created, creditors could look at the information on a report but had no easy way of calculating risk. In the mid-20th century Earl Isaac, a mathematician, and Bill Fair, an engineer, developed an algorithm that could be used to calculate a person’s credit score using information from their report. While the idea was slow to catch on, as soon as major credit card issuers such as Carte Blanche and Montgomery Ward started using the system, it became widespread.


Understanding your credit score and its relationship to the scores of other consumers first requires understanding how it is calculated. Five factors go into the calculation, and each is given a different weight in the calculations. For example, 35% of your credit score is determined by your payment history. If you have a good credit score, a single late payment can cause a steep drop. Another 30% of your score is based on how much money you owe. Having too many open accounts and too many balances that are close to being maxed out lowers your score. Rounding out your credit score are the last factors: the length of your credit history (15%), number of attempts to take out new credit (10%), and the mix of credit types you have (10%).


The Fair Isaac Corporation (named for the founders of the company and the algorithm) reports the percentage of Americans who fall into different credit score ranges. Determining the cut-offs for so-called good credit scores can be difficult but is usually around 720. About 58% of Americans have a credit score rating of over 700. According to the myFICO.com web site, the median score in the United States is 723. About one third of Americans have scores between 550 and 700 while 7% have scores lower than that.


Credit scores are highly significant in today’s world. For one, they are a large factor in whether or not you secure financing for new homes and other property. They also impact how much you will pay for that loan. The monthly payment on a 30 year, $300,000 mortgage for someone with a credit score of 760 or above is almost $1,000 less than the payment for someone with a score of 500 to 579. For a mortgage half that amount, the difference in mortgage payments would still be over $500 per month thanks to the high interest rate charged to people who have lower credit scores.


A common misconception about credit scores is that a high score automatically earns you approval for new credit. That is not always the case. If you have a high score now but also carry a high debt-to-income ratio, lenders may fear you are already burdened with as much debt as you can handle and will not take the risk of extending more. Likewise, if you have a low score, you may be able to get approval if your debt-to-income ratio is low, you have a sizable down payment, or you have collateral.

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