How important is your credit score? If you want to borrow money, it can mean the difference between an affordable option and no option at all. If you buy a house or a car, or your child or grandchild is applying for a credit card for the first time, chances are a lender will request a credit score before making a decision.
A credit score is a number, based strictly on credit history, created to help creditors weigh the risks they take when they loan money. Your credit score determines whether you can get credit and your interest rate. Higher numbers look better to lenders and many time, those scores get lower interest rates. Your score plays a vital role in most borrowing situations, so it’s important to understand what goes into it.
How Does It Work?
- Credit scoring is a statistically based prediction of how likely it is that a borrower will repay a loan. It can either show lenders that you are low risk or raise red flags that you are a high-risk borrower.
- When you manage your credit responsibly, your credit score goes up over time. A strong credit history will give you a strong credit score.
- Your income does not directly affect your credit score, but it does affect your ability to qualify for a loan. You could have a low income and a high credit score, or a high income and a low credit score. It just depends on your credit history.
What Are Common Scores?
Credit scores can range from 300 to 850, according to Fair Isaac Corporation (FICO®), the developer of today’s most commonly used scoring system.
Average credit scores vary by age groups, and generally, the older someone is and the more experienced with credit they are, the higher their credit score will be. Most people score in the 600s and 700s. Scores by age group are:
| Generation | 2019 | 2020 |
| Generation Z (18-23) | 667 | 674 |
| Millennials (24-39) | 668 | 680 |
| Generation X (40-55) | 688 | 699 |
| Baby Boomers (56-74) | 731 | 736 |
| Silent Generation (75+) | 757 | 758 |
Source: Experian, March 2021
No Credit Score Lasts Forever
Scores change over time as your credit maintenance changes. Depending on a variety of factors, your score can go up or down at any time. In fact, every time you apply for, use, make or miss a payment on a loan or credit card, you add on to your credit report and either raise or lower your score.
Protecting Your Credit
Raising your credit score and improving your credit history go hand in hand, so it’s important to know what’s on your credit report and take responsibility for monitoring it. Thanks to the federal Fair and Accurate Credit Transactions (FACT) Act, you are entitled to a free copy of your credit report once every 12 months from each of the three credit bureaus – Equifax, Experian and TransUnion.
If you review your credit report and something seems unusual, be sure to check with your credit card company or lender as soon as possible. Roughly 7 to 10 million Americans are victims of identity theft each year, and the last thing you need is to be a thief’s next victim.
