Credit Scores Hit New Highs - But You Should Aim Higher

man in suit showing a signboard with the different ranges of the credit score: excellent, good, fair and poor
Juan Moyano/Alamy

During the financial crisis, millions of Americans found it nearly impossible to get the credit they so desperately needed. With skyrocketing foreclosure rates on mortgage loans gone bad and high default rates on credit cards, the health of the credit markets brought the financial system to the brink of collapse.

Today, almost six years after that crisis began, America's credit picture has gotten better. According to figures from credit-scoring agency FICO, the company's proprietary FICO scores have reached their highest average level since the agency started keeping records in late 2005. But even though credit scores at new record levels might sound impressive, most people have a long way to go to get the healthy credit scores they should seek.

Much Ado About Six Points

According to the latest available figures, the average FICO score hit 692 as of April. That represented an improvement of a single point from the year-ago measurement, and it brought the total gains since the score hit its lowest level in late 2009 to six points.

Admittedly, when you're talking about an average that covers tens or even hundreds of millions of people, a few points make a big difference. A FICO spokesperson noted that reducing the amount of debt outstanding likely played a huge role in the gains, as falling outstanding debt would lead to more favorable ratios of credit used to total credit limits.

%VIRTUAL-WSSCourseInline-845%Yet going from a score of 686 to 692 in a span of nearly five years has only limited value for the average American borrower. For many borrowing decisions, a score of 692 is still considered to be just on the upper end of acceptability, with good scores ranging from 700 up to the maximum of 850. Six points can prove to be the difference in getting a favorable decision from a lender, but it's rarely the decisive factor.

Perhaps more important, FICO itself argues that raw scores by themselves don't tell consumers whether they'll be able to get the financing they need. Many lenders use FICO scores, but each has its own strategy that it follows to make lending decisions, and so a score that would get you a loan at one institution might lead to your being denied at another.

Finally, credit scoring methods are regularly revised to reflect default experience more accurately. FICO announced its latest changes to its scoring methodology in August, with FICO Score 9 incorporating new information about how collection agencies deal with outstanding medical debt compared to non-medical debt. For some borrowers, that alone could boost FICO scores by 25 points.

Real Change for Your Credit Score

If you want to make real improvements to your credit score, you need to understand the most important factors in calculating it. Payment history makes up 35 percent of your score, and so making payments on time and keeping current on your outstanding bills is essential in keeping your score up or helping it rise after past mistakes. Another 30 percent comes from comparing outstanding debt to your total available credit, and paying down debt so that it's a lower percentage of your available credit can boost your score.

What you shouldn't expect, though, is a quick fix that will give you a major increase in your credit score in a short period of time. Given enough time, you can put past credit mistakes behind you, but it takes patience and discipline to establish healthy credit and demonstrate an ability to sustain it. Once you do, though, you'll quickly see the value of having a strong credit score -- and that should provide you with ample motivation not to let yourself slide back into bad habits once again.

Gains in the overall average credit score in America are good news for the economy as a whole, but you should strive to do more for your own personal score. Getting a good or excellent credit score will give you opportunities that others never get, and so it's worth taking steps to improve your credit and reap the rewards of a high score.

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