Credit scores are designed to help creditors predict who will repay them on time. The most widely-used scoring system was created by Fair Isaac Corporation, and is called the FICO score. According to the Wall Street Journal, the average FICO score in the US was 711 in October 2013, the latest available data.
Another scoring system, the Vantage Score, was developed by the three major credit bureaus (TransUnion, Equifax and Experian) together. It's supposed to deliver a more "consistent interpretation" and "accurate score" than the traditional FICO, and is gaining in popularity among lenders. According to VantageScore's website, the score is used by
- 7 of the Top 10 major financial institutions
- 8 of the Top 10 credit card issuers
- 6 of the Top 10 auto lenders
- 5 of the Top 5 mortgage lenders
LendingTree.com now offers consumers a free Vantage score,
What's a Good Credit Score in 2014?
Most lenders classify applicants by credit score. The tiers below are fairly typical.
760 +: This is the top level. Fannie Mae and Freddie Mac offer their best mortgage rates to applicants with credit scores of 740 and above, while other lenders draw the line at 760. If your scores are in this range, you can shop very aggressively for a mortgage because you deserve the best rates lenders can offer! You'll also be eligible for the best credit cards, personal loans, auto financing and more.
720 to 759: The Wall Street Journal says that the average credit score of borrowers approved for conforming loans (those backed by Fannie Mae or Freddie Mac) was 755 in February 2014. This score is considerably higher than average for consumers as a whole, but it's merely average for those who get approved for home loans. It's a respectable score and should make you eligible for excellent interest rates.
680 to 719: Once your credit score dips below 720, you may no longer be eligible for the very best mortgage rates, but you should have little difficulty finding a good loan. Check LendingTree's real-time mortgage rates based on your credit score, loan amount and other factors, which shows that for a conventional 30-year fixed 80 percent loan, the APR ranged from 3.878 percent for those with scores of 760 and above to 4.335 percent for borrowers with 640 FICOs.
620-679: With a below-average credit score, you'll have fewer options and you'll pay more for financing. LoanExplorer came up with a rate of 4.309 percent for those with a 660-679 score (notice the difference in rate for a 679 score versus 680 -- increasing your credit score by a single point could save you thousands over the life of a mortgage).
Below 620: Fannie Mae and Freddie Mac will only allow home loans for borrowers with a scores of 620 and higher in most cases. Fannie Mae says, "A minimum required credit score of 620 applies to all mortgage loans delivered to Fannie Mae in accordance with the Selling Guide; exceptions to this requirement are limited to loans in which any borrower has nontraditional credit." Freddie Mac's restrictions are similar. FHA, VA and other government-backed home loan progrms do allow lower scores -- technically as low as 500 if you put ten percent down, but here's the catch. You can be approved with low credit scores, but not with bad credit. If your low credit scores are due to your history being very short or limited, or to having lots of accounts or too many inquiries, or even missed payments in the distant past, you may be eligible for financing. However, if the low scores are caused by recent derogatory credit on your report, you are unlikely to be approved.
The Cost of Low Credit Scores
The insurance industry has found that people who have low FICO scores are more likely to file claims. Insurers often use credit ratings to help determine home and auto premiums, and poor credit scores may affect what you pay a lot more than you think. A 2014 study by WalletHub concluded that on average there is a 65% differential in the cost of car insurance premiums between a driver with an excellent credit score and one with no credit history.
Poor credit may even hamper your job search. While a lawmakers at state and federal levels are working on legislation to take credit scoring out of the hiring decision, it's still legal in many places for employers to require a credit check before finalizing a hiring decision.
What You Can Do
The first step in improving your credit score is to know what it is. You can get your Vantage score for free from LendingTree. Then track your score's improvement as you pay your bills on time, reduce your balances, and build a positive credit history. Credit scoring systems put more weight on recent history than on past behavior. That's good news for those working to overcome past mistakes and build a solid financial future.