Understanding Credit Scores: An OverviewCredit scores are three-digit numbers that determine an individual’s creditworthiness. Financial institutions use these scores to know a person’s creditworthiness when seeking a loan or credit card. Generally, scores range between 300 and 850, with higher scores representing higher creditworthiness. Several companies, including VantageScore and FICO, calculate credit scores differently. However, VantageScore 3.0 is becoming increasingly popular, with an average American credit score of 698 in February 2021.
The Significance of the Average American Credit ScoreThe average American credit score represents a crucial aspect of the nation’s overall financial health. A higher average credit score indicates that people generally have more debt payment potential, indicating a robust economy. On the contrary, lower scores denote that people have less ability to pay their debt and can indicate economic weakness. It is therefore crucial to understand how credit scores vary from state to state.
How Credit Scores are CalculatedCredit scores are calculated based on an individual’s credit history and financial behavior. The credit reporting agencies analyze factors such as payment history, the age of credit accounts, types of credit accounts, and the overall credit utilization rate. These agencies then use algorithms to calculate scores for each consumer. Some of the critical factors that impact credit scores include:
- Payment history: Your payment history accounts for 35% of your score and typically involves making payments on time or past deadlines.
- Total amount owed: This accounts for 30% of your score and is determined by the amount owed on credit cards, loans, and other credit forms.
- Credit history’s length: Approximately 15% of your credit score considers the age of credit accounts.
- New credit inquiries: Too many credit inquiries can negatively impact your score as it accounts for 10% of the credit score.
- Types of credit: The different types of credit accounts (credit cards, mortgages, car loans, student loans, etc.) can impact your score. This accounts for 10% of your score.
Divergence in Credit Scores Across the United StatesCredit score averages vary across states, with some areas having consistently higher scores and other states, much lower. Several factors contribute to this diversity, including population diversity, cost of living, and regional industries. For instance, areas with a higher concentration of oil and gas industries tend to have higher median incomes and higher credit scores.
Lowest and Highest Average Credit Scores By StateThe following are the states with the highest and lowest credit scores, according to Experian’s 2019 data: Highest average credit scores by state
- Minnesota – 725
- North Dakota – 717
- South Dakota – 715
- Vermont – 714
- New Hampshire – 712
- Mississippi – 675
- Louisiana – 677
- Alabama – 680
- Georgia – 682
- Texas – 685
Factors that Affect Credit ScoresSeveral factors can impact credit score, with late payments being the single biggest factor. In addition, the number of inquiries you have on your credit report, levels of debt, and types of credit used can also affect the score. Some of the factors that can impact your credit score include:
- The number of late payments you have on your credit report
- The number of hard inquiries you have on your credit report
- The total amount of debt you have
- The length of time since you opened accounts
- The types of credit accounts you have
Tips for Improving Your Credit ScoreIf you have a low credit score, there are several steps you can take to improve it, including:
- Pay your bills on time or ahead of time
- Keep the balances low on credit cards and revolving credit lines
- Avoid opening too many credit accounts too close together
- Do not cancel a credit card so quickly
- Regularly monitor your score and credit report, ensuring that they do not contain errors