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Monday, January 23, 2017

A Productive Rant About Credit Scores



There’s a part of me that wishes I could still begin an article with “the average credit score across the nation is 666”. This is a nugget of information that is no longer true, and hasn’t been since around 2012 - the average credit score across the nation is now estimated to be around 673 - which is somewhat of a shame, because 666 is one heck of an ominous and slightly amusing number!

Still, we can’t be too sad about this fact. After all, a credit score of 673 is definitely better than the average credit score of 666 that we were seeing about five years ago. But should we be jumping around and cheering just yet? The fact is that the difference doesn’t really seem that big, right? Besides, is a score of 666 or 673 actually anything to be grateful for in the first place? (It is worth pointing out that there are many differences in average credit scores if you split things by state or generation - you’ll start seeing more optimistic estimates if you do this, as well as some lower ones.)


The fact is that credit scores around this range aren’t usually treated as particularly good credit scores. This is how the vast majority of banks, credit report firms, and lenders in general see credit scores: If you’ve got a credit score below 600, then things aren’t looking very good. A credit score of between 600 and 649 isn’t outright considered “bad” by that many companies, but it’s often considered “poor”. The range that the average nationwide credit scores have been hovering around in over the past few years is the 650-699 range, which is seen as “fair”. So it’s not bad - but potential lenders aren’t exactly going to be falling over each other in a massive rush to lend you money.

But there’s a big problem with using generalization and trusting it too much: people don’t actually have what we call a universal credit score. It’s actually quite difficult to argue that the average person has a given credit score. Rather, it’s more realistic that a given person will have an average credit score. (And I mean that in terms of frequency, not quality - even though the average score of 673 does suggest this regardless!)


If you were to get five credit reports from different institutions, then you would probably get five different scores back. They’re not likely to differ that much from each other, but the fact is that different institutions use different models with which to gauge your credit score. And heck, depending on their model, they may consider a credit score of 673 to be more than fair, even into “good” territory!

Understanding these sorts of credit score averages can actually help a lot when it comes to understanding our current economic and financial situation in the country as a whole. With the era of Trump now upon us and many vigilant and critical eyes on the economy, this could be more important to your personal finances than you could possibly imagine.

For all of Trump’s flaws, many are cautiously optimistic about his plans for deregulation of many financial and economic areas. (Although, of course, some are worried for the exact same reason!) With continuing growth in debt to consider, it may be smart to consider just how likely you are to require a quick loan at some point in the near future. Your credit score is going to have a lot of implications on your ability to get a loan. The measures that the government are going to take will also have direct implications on your ability to get a loan even if you do have bad credit.


At some point in most of our lives, we’re going to need a cash injection for something. Be it buying a new home, renovating our current one, helping our kids with college, or financing a vehicle, more and more people are looking into loans. And we should also keep in mind that people who need money for these sorts of reasons are probably on the luckier side of this coin; there are many people out there who need quick loans for real financial emergencies, who have to struggle with low income and a bad financial reputation.

This is why it’s so important that we get to grips with both our personal finances and the finances of society at large. Much of this understanding can be attained through the lens of credit scores.

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