If you’re new to credit scores or credit in general, you might find all of it a little bit bewildering at first. The fact is, understanding your credit score is relatively simple but incredibly vital to your financial health. Simply put, your credit score is a numerical indicator that financial institutions use to determine your credit risk. The FICO scores the most common and the three largest credit reporting agencies, Experian, TransUnion and Equifax, tabulate your credit score and allow financial institutions to see it when their considering lending you money.
One of the most interesting things about your credit score is that it doesn’t start out as a great number, you have to earn it. Increasing your credit score means that you actually have to apply for credit, receive that credit and then pay back the amount that was lent to you on time. It’s for this reason that young adults usually have the lowest credit scores, because the length of time that a person has a credit history accounts for 15% of their score. Some other factors that affect your credit score include;
- Your payment history, which is approximately 35% of your score.
- The amount of money that you owe, 30%.
- 15% is based on the length of your credit history.
- New credit and recently opened credit accounts take up 10%.
- The type of credit that you are using makes up the final 10%.
While the FICO score doesn’t take into consideration a person’s age, as we stated earlier the length of time that you have credit is definitely a factor. Although young adults may be at a bit of a disadvantage because of that, it is still possible to get a favorable score if the rest of your credit report factors are good. For example, if you have a number of new accounts they will lower the average account age, something that could in turn lower your credit score.
The fact is that FICO likes to see accounts that are established. If you’re a young adult and you have several years’ worth of credit history and no new accounts to lower your average, you can actually increase your credit score substantially.
The numerical score that FICO uses starts at 300 and goes up to 850, which would be a perfect score. The truth is however that only one percent of all consumers actually have perfect credit score. You can consider your credit score ‘very good’ if it is higher than 720. At this number, you’ll qualify for the best interest rates on mortgages, more favorable terms on other lines of credit and generally have an easier time than most getting the credit you need.
If you have a credit score between 580 and 720 you will more than likely be able to get credit but your interest rates will be higher and you may have some difficulty with different types of larger loans like mortgages and business loans. If your credit score falls below 580 you will more than likely have a difficult time finding any type of credit that’s reasonable.
According to the online credit reporting source Credit Karma, there is a direct correlation between a person’s age and their credit scores. It is also seen that the older person is the higher their credit score usually is. The approximate age and credit score is broken down below.
- 18 – 24 is 638
- 25 – 34 is 652
- 35 – 44 is 659
- 45 – 54 is 685
- 55+ is 724
These are averages of course and they are based on a relatively limited amount of data. Many individual credit scores will be higher or lower than the average for a wide variety of reasons. For example, someone in their 20s could easily garner a credit score above 800 if they make careful use of their credit, good credit decisions and pay all of their bills on time. On the other hand, a person in their 50s or 60s could easily have a very low score because of bad financial decisions, failure to pay on time, bankruptcies and so forth. FICO, using the 5 factors that we talked about, takes all of this into consideration.
At the end of the day your credit score, while only a number, can have direct ramifications on your ability to do a number of things, including purchase a house, purchase a new car or get student loans. That’s why, from the very beginning of your adult life, you should always strive to take care of your credit, pay all of your bills on time, don’t go too far into debt and carefully use credit cards. The better that you can do that, the better your credit score and the easier your financial life will be.