What Credit Score Should You Have?
by Jean Folger/Financially Fit
A credit score is a number that helps lenders evaluate a person's credit report and estimate his or her credit risk. The most common credit score is the FICO score, named after software developer Fair Isaac and Corporation. A person's FICO scores are provided to lenders by the three major credit reporting agencies — Experian, TransUnion and Equifax — to help lenders evaluate the risks of extending credit or loaning money to people.
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A person's credit score affects his or her ability to qualify for different types of credit and varying interest rates. A person with a high credit score may qualify for a 30 year fixed-rate mortgage with 3.8% annual percentage rate (APR). On a $300,000 loan, the monthly payment would be $1,398. Conversely, a person with a low credit score, assuming he or she qualifies for the same $300,000 mortgage, may pay 5.39% on the loan, with a corresponding monthly payment of $1,683. That's an additional $285 per month, or $102,600 over the life of the mortgage, for the person with a lower credit score.
Unfortunately, we don't start with a clean slate as far as credit scores are concerned. Individuals have to earn their good numbers, and it takes time. Even when all other factors remain the same, a person who is younger will likely have a lower credit score than an older person. That's because the length of a credit history accounts for 15% of the credit score. Young people can be at a disadvantage simply because they do not have the depth or length of credit history as older consumers.
Factors That Affect Credit Scores
Five factors are included and weighted to calculate a person's FICO credit score:
• 35%: payment history
• 30%: amounts owed
• 15%: length of credit history
• 10%: new credit and recently opened accounts
• 10%: types of credit in use
It is important to note that FICO scores do not take age into consideration, but they do weight the length of credit history. Even though younger people may be at a disadvantage, it is possible for people with short histories to get favorable scores depending on the rest of the credit report. Newer accounts, for example, will lower the average account age, which in turn could lower the credit score. FICO likes to see established accounts. Young people with several years worth of credit accounts and no new accounts that would lower the average account age can score higher than young people with too many accounts, or those who have recently opened an account.
Average Credit Scores by Age
FICO scores range from a low of 300 to a high of 850 — a perfect credit score which is achieved by only 1% of consumers. Generally, a very good credit score is one that is 720 or higher.
This score will qualify a person for the best interest rates possible on a mortgage and most favorable terms on other lines of credit. If scores fall between 580 and 720, financing for certain loans can often be secured, but with interest rates rising as the credit scores fall. People with credit scores below 580 may have trouble finding any type of legitimate credit.
Based on data compiled by Credit Karma, there is a correlation between age and average credit scores, with scores rising along with age. According to their data, the average credit score by age is as follows:
Age Credit Score
Keep in mind, these are averages based on limited sampling of data, and many individuals' credit scores will be above or below these averages for a variety of reasons. A twenty-something, for example, could have a credit score above 800 by making careful credit decisions and paying bills on time. Likewise, a person in his or her 50s could have a very low credit score because he or she took on too much debt and made late payments. The FICO credit scores take all five factors into consideration.
The Bottom Line
The Experian National Credit Index study helps explain how the behavior of certain age groups can affect average credit scores. The study found that people in the 18-39 age group had the greatest number of late payments during the previous 12 months; that the 40-59 age group held the greatest amount of debt; and the 60+ age group had the lowest average credit utilization (used the least amount of credit that was available to them).
Though it is not unheard of for a young person to have a stellar credit score, more commonly these ratings rise as people acquire credit, make careful credit decisions, pay bills on time, and gain depth and length in their credit histories.