Credit scores are climbing – why you can’t afford to get left behind

The following is presented for informational purposes only and is not intended as credit repair or credit repair advice.

Credit scores keep on rising. According to the Fair Isaac Corporation, creators of the widely used FICO credit score, the average American credit score is the highest it’s been in over a decade.

On a scale that runs from 300 (lowest) to 850 (highest), American consumers now sport an average FICO score of 695. Almost 20 percent of consumers with calculable scores are above 800.

The uptick in scores is largely attributed to the stabilized housing market. Credit also goes to a generally increased awareness of credit scores and the factors that determine one’s score. Many creditors now offer some variety of credit monitoring service to help consumers understand their score and how it rises and falls.

Higher scores are great for the consumers who’ve put in the work and are seeing it all pay off. The higher your score, the less risky you appear to potential lenders. The less risky you are to creditors, the better rates and terms those creditors can offer you. Good credit gets you even better credit.

Those without pristine credit ratings, however, may find that everyone else’s good fortune is their misfortune.

A widening gap

Remember that credit scores are primarily used by lenders to assess risk. They’re a form of mathematical shorthand that allows creditors to quickly determine how likely it is that a potential borrower will repay their debt per the terms of the agreement. If someone’s score is too low a creditor may raise the interest rate or add fees in order to offset the risk. They may also deny the borrower’s request for credit outright.

As the average credit score rises, lenders find themselves able to be increasingly choosy about their customers. When nearly one out of every five consumers has an excellent credit score that creates an enormous pool of very low-risk credit prospects. In other words, lenders can be very profitable while keeping risk at a minimum.

Consumers with less than perfect credit, unfortunately, may find themselves left behind. Bad credit has always been “expensive”, but as the gap between a consumer’s score and the national average grows, they’ll almost certainly find the cost of using credit too high to bear.

Playing catch-up

If your credit score falls on the low end of the spectrum it’s important to take steps to avoid falling even further behind.

First, don’t panic. Below average credit cannot be fixed overnight – just like great credit can’t be built in a day. Proving your creditworthiness takes time. If your score is low accept that creating a higher score is a long-term project. Anyone who offers to "fix" your credit in a short amount of time is selling you a handful of financial magic beans. 

Second, understand why your score is what it is. Pull a copy of your credit report and see what’s being reported. Review the fundamentals of great credit – no missed payments, staying well below your credit limit, having a stable, diverse account history, etc. – and see where you may be lacking. If you’re unsure what’s wrong with your credit history, consider speaking with a certified credit counselor for additional guidance.

Third, create a plan to shore up your credit weaknesses. Once you understand what’s causing your low score, you can start taking active steps to correct those issues. It’s a process, and the results won’t be immediate, but having a plan is a great way to stay on track and keep moving toward your goal.

Finally, keep paying attention. Most people don’t think about their credit score until their credit suddenly matters. When you’re about to need a big loan, that’s when you’ll start to care about your score. Unfortunately, if you only pay attention to your credit when you need good credit it will probably be too late. There are plenty of easy ways to obtain your credit score. You can even see your score for free through a number of different online resources. So check your score periodically. Make sure it’s going in the right direction. If you create the right plan and see it through, over time you’ll see your score climb.

Jesse Campbell is the Content Manager at MMI, focused on creating and delivering valuable educational materials that help families through everyday and extraordinary financial challenges.

  • The Consumer Federation of America (CFA) is an association of nonprofit consumer organizations that was established in 1968 to advance the consumer interest through research, advocacy, and education. Today, nearly 300 of these groups participate in the federation and govern it through their representatives on the organization's Board of Directors.

  • Since 2007, the Homeownership Preservation Foundation (HPF) has served as a trusted, neutral source of information for more than eight million homeowners. They are partnered with, and endorsed by, numerous major government agencies, including the U.S. Department of Housing and Urban Development and the Department of the Treasury.

  • The mission of the U.S. Department of Housing and Urban Development (HUD) is to create strong, sustainable, inclusive communities and quality affordable homes for all. HUD works to strengthen the housing market in order to bolster the economy and protect consumers; meet the need for quality affordable rental homes; utilize housing as a platform for improving quality of life; and build inclusive and sustainable communities free from discrimination.

  • The Council on Accreditation (COA) is an international, independent, nonprofit, human service accrediting organization. Their mission is to partner with human service organizations worldwide to improve service delivery outcomes by developing, applying, and promoting accreditation standards.

  • The National Foundation for Credit Counseling® (NFCC®), founded in 1951, is the nation’s largest and longest-serving nonprofit financial counseling organization. The NFCC’s mission is to promote the national agenda for financially responsible behavior, and build capacity for its members to deliver the highest-quality financial education and counseling services.