The Average Credit Score of Americans

All the negative talk about the American economy has me wondering about the average credit score of Americans. As you may be aware, the U.S. government has faced its own credit downgrade. Did we deserve to be downgraded? Well, our national average seems to be right in line with the decision to lower the country’s financial credibility. The average personal credit score for Americans falls in the middle of the “good” category, quite short of the top grade of “excellent”. Lets start with the scoring.

Credit Scoring

Every consumer who uses credit has a separate score from each of the three major credit-reporting agencies. TransUnion, Equifax and Experian all calculate their numbers using the FICO scoring model. Scores start at a dismal 300 to the apex of excellence of a perfect score at 850.

Taking the three scores together and dividing the total by three will give your average overall score. But for the purposes of lenders they generally use the middle score as a reference.

So for example, if your three scores are 650, 700 and 670, the median score of 670 will be used. On the grade scale below, provided as a guide and not a definitive set of rules, you would earn a solid B and be considered an acceptable risk for most loans.

Score Range Grade
741 – 850 A (excellent)
641 – 740 B (good)
541 – 640 C (fair)
451 – 540 D (poor)
300 – 450 E (just plain awful)

Little Reason to Cheer

Americans are doing moderately well, according to the printed stats, with an average score of 688. This score may fall in the “good” category, but lenders may not see such a rosy picture, as it falls on the lower end of a good grade. Many lenders often consider anything below 620 as ‘poor’, moving a score of 688 to ‘fair.’ Unlike an excellent score, consumers with the current national average may find lenders slow to approve and require collateral or additional money down. While most American haven’t lost total grasp on fiscal responsibility, the need to improve is clearly present and the farther behind you fall the longer it’s going to take to return to a good score.

The Impact of a Few Points

Don’t make the mistake of thinking that a few points won’t make a difference – they can potentially cost hundreds or thousands of dollars. For example, a one-point shift downward in your FICO score from 640 to 639 in the state of Michigan can mean the difference between a $150,000, 30-year fixed mortgage at 4.409% and one at 4.949%. The out-of-pocket difference will cost nearly $50 a month over the course of thirty years.

A surprising finding is that an excellent score of 750, a hundred points short of perfect, will get the same low interest rates as that perfect score. So, for many Americans, making a few changes in how they manage their finances and being patient, may raise their score by the necessary 62 (from 688 to 750) points to be rewarded with better terms in the loans they need in the future…which saves you money.

A Promising Future

A more educated consumer receives the benefit of hard times. They are better prepared for changes in the lenders requirements. We are seeing a shift in how consumers utilize credit. More and more people are no longer living on borrowed money as if tomorrow will never come. Credit scores are becoming a bigger part of the American conscience with more people taking the time to monitor their credit activity.

In the end lenders still have the ultimate decision on how specific credit numbers are viewed. With defaults at near record highs and unemployment still a concern, tighter standards may be the name of the game for some time. What was once considered excellent may now be seen as good. Diligent oversight with how you manage your credit accounts will keep your score high or help increase it. Each person has the ability to help themselves and their country by taking steps to improve the ways they use credit and improving their financial credibility.

Check out how you compare with others of your generation.

About The Author: Noreen Ruth is a contributor for ASAPCreditCard.com and several other popular finance websites. She is interested in educating consumers about using credit responsibly and about legislative action that will affect their ability to borrow the money they need. She has contributed hundreds of articles to various online sites that provide content to inform consumers on loans, credit cards, debt relief services and other finance related topics. To read more of her continual posts and additional writings, visit the credit news blog.

Thanks for the great article Noreen. Make sure to check out some of her other articles at ASAP Credit Card. If you’d like to write a guest pest on HackingTheBank, shoot me an email.

The Average American Household Credit Card Debt

When economic times are good, statistics like the average household credit card debt aren’t as interesting. People are employed and they’re able to get loans for just about anything they want. When the economy goes sour, that’s when consumers and policy makers alike become more concerned with data on the financial health of Americans. Luckily for us, the U.S. government is always compiling economic data to help influence policy decisions. Unfortunately, there is almost always a large lag between the period in which the data is collected, and when it’s released. To find out the hard data compiled on the average household credit card debt, I went directly to the Federal Reserve’s 2007 Survey of Consumer Finances and 2009 Survey of Consumer Finances Follow-up. The 2007 Survey is the normal survey conducted every three years, which was the source for most of the information posted below. The 2009 Survey was a follow-up that re-interviewed the original 2007 participants to see how their finances changed between 2007 and 2009.

General Debt of American Households
Average Household Credit Card DebtIn 2007, the Survey of Consumer Finances reported that 77% of American families had some type of debt. I find debt to be interesting because its highest use is the middle class. The poorest families, below the 20th percentile of income, were least likely to have debt. Of these families, 52.6% held any form of debt, and only 28.8% had credit card debt. This stems from the fact that people in this income bracket are the least credit-worthy. Families with incomes in the 90th percentile are the second least likely to carry credit card debt, at 38.5% of families.

Average American Household Credit Card Debt
In 2007, the average American household that held credit card debt was $7,300. It’s clear that the credit card balances of some families is quite high because the median balance for families with credit card debt is $3,000. That means there are families with significant amounts of credit card debt that bring up that average. Balances held by high-income families, childless couples, and families headed by someone who is self-employed increased the most.

Average Credit Card Balance
In its 2007 Survey, the Federal Reserve found that 73% of families had a credit card. This statistics surprised me, because it means that 27% of American do not have a credit card. I’m guessing this 27% is composed of poor people who do not qualify, and Dave Ramsey fans who have cut theirs up. The Federal Reserve also found that 46% of families held credit card debt.

Average Credit Card Limit and Interest Rate
The median number of credit cards held by families in 2007 was two. That’s a far-cry from my wallet-busting 10+. However, two is probably all that someone genuinely needs. The median credit limit was $18,000, which means some people have some very high credit limits. I’m sure that the median limit has fallen since 2007. The median interest rate on the card with the highest balance (or newest card, if no balances) was 12.5%.

Overall this data is interesting, but there isn’t anything terribly shocking. I was surprised at the fact that the median credit card debt by those carrying a balance was only $3k. I guess Americans are more responsible than common media might lead us to believe. Good for us.

(Photo: 401K)

What’s the Best Credit Card (for me)?

I have more credit cards than the average person. Sometimes when I whip out on that’s cool looking, like my American Express Blue Cash Everyday card, I’ll get the question: What’s the best credit card? My answer probably doesn’t satisfy most people, but the real question is: What’s the best credit card for me? There is no single, best credit card that fits the needs of everyone. You can compare a credit card to a car in the fact that they all look and function quite differently. And based on our own individual needs, certain cars will be more optimal than others. It’s the same for credit cards.

So how do you go about choosing a good credit card? You’ll need to inspect your current financial health and consider you current and future needs. Only by going through this process can you actually select the best credit car for you. Stop basing your credit card decision on the free towel they’re giving away at the pro sports game.

Your Credit Card History and Financial Health

If you’ve had a credit card in the past, or you have other credits cards, then you need to consider whether you carry a balance or not. If you always pay your credit card balance off completely each month, then you don’t need to worry about this part. However, if you regularly carry a balance on your card, then the interest rate is the simple most important characteristics of your future credit card.

Find the Best Credit Card for MeWhen you first get a credit card there will be an introductory interest rate. Most cards will have an introductory rate of zero percent, or close to it. You’ll then want to determine how long this introductory interest rate will last. Clearly a longer period is better. Look for something around a year. You will also want to consider the long-term rate of the card. If you don’t plan on having too many credit cards, but plan on carrying a balance, this is going to be very important. Don’t be suckered into getting a card based on its low introductory rate. You will usually see this displayed as some rate + prime. As of this writing, the prime rate is 3.25%, so you can calculated the interest rate from there. If you’ve been late on your credit card payment in the past, you’ll also want to consider the adjusted rate that will be used if you’re late with a payment.

Your Spending Habits

If you consistently pay off your credit card, then you’re really able to take advantage of the benefits of a credit card. This is the true difference between someone who uses their credit card as a short-term loan, and someone who takes advantage of their credit card. If you’ve been using some type of budget tracking software such as Mint.com, then review your spending habits over the past three to six months. Review your spending categories by the ones commonly used by credit card companies, such as gas, groceries, office supplies, books, restaurants, and entertainment.

You will then look for credit cards that reward you the most in the areas where you typically spend the most. For me, I typically spend quite a bit on gas and Amazon. So I have a credit card that gets me 3% back on gas, and another that gives me 5% back on Amazon (because all Amazon purchases fall into the “books” category). When spending money, I determine the card to use based on the rewards that I will accumulate. Because I always pay off my credit card, it’s the only criteria I really use to determine which card to use for a specific transaction. I don’t have to worry about how much money is on which card, or when that payment will come due.

The best way to find the credit card that fits you, once you know your history with credit cards and your spending habits, is to go directly to the major bank websites. American Express, Citibank, Chase, Bank of America, and CapitalOne are the most common. You can also check out the card providers directly: Visa, American Express, MasterCard, and Discover. In my opinion it’s best to go directly to the card companies rather than Googling because Googling will just show you the ones that people are marketing (spamming) the most. These won’t necessarily be the best cards for you.

If you usually make bad financial choices, then you probably shouldn’t apply for any credit cards. But if you’ve got your spending under control and you’re diligent, credit cards can provide a lot of benefit, and I think it’s silly when a major personal finance guru such as Dave Ramsey gives blanketed advice to people to destroy their credit cards and only pay with cash.