Despite being a financially turbulent year, Americans raised the average credit score to 711 in 2020 — the 2019 average was 703. This was calculated using the Fair Isaac Corporation (FICO) scoring model, allowing lenders to assess creditworthiness. FICO scores look at a person’s payment history, level of indebtedness, spending history, and accounts of credit.
Credit scores reach record highs
Credit scores are indicative of a person or company’s borrowing history and behavior. They could be anywhere between 300 and 850. Those with higher credit scores usually get better interest rates on loans and are offered credit cards with better perks. FICO considers credit scores of 670 and up to be “good,” and the 2020 credit score average of 711 happens to fall in that range.
When millions of Americans found themselves unemployed and struggling to pay the bills, FICO scores shifted upwards last year. Leader of research and analytic development at FICO, Ethan Dornhelm, attributes this increase to both the lag in the scoring data and the relief actions taken by federal agencies and lenders early on during the pandemic. These initiatives – including the enhanced unemployment benefits, CARES Act, and forbearance programs – have helped mitigate or delay the dip in credit scores.
Dornhelm goes on to say that reported missed payments were significantly reduced as the year wore on. For example, in July 2020, only 7.3% of borrowers in America missed payments exceeding 90 days compared to 8.1% in January. It’s also important to note, however, that the consumer market remains volatile. At this rate, it’s hard to forecast whether the national average credit score will continue to rise or will plunge downwards. Having said that, it’s prudent to practice good credit management and put financial plans in place.
Tips for maintaining good credit scores
Americans are now in a prime position to improve their credit scores or maintain the status quo. There are strong government and employer support as well as more leeway for credit payment. Leverage those alongside the following practices:
1. Pay your bills on time
This is one of the best and simplest ways to boost credit scores – it sets a pattern of good behavior. It also lowers your debt and keeps you in good standing with your creditors while also building up your reputation with potential lenders. Paying on time helps you avoid penalties and can be a great way to build up healthy financial habits.
2. Don’t apply for unnecessary credit cards
Getting several credit offers doesn’t mean that you have to take each one. In fact, it may work to your advantage if you don’t. In a post on credit scores by Petal, it’s recommended that an average person gets just one or two credit cards. These are sufficient for the average person with a variety of credit needs. Anything beyond that can lead to increasing and unmanageable debt.
3. Watch your debts
This is particularly crucial during financially challenging times. It’s important to look at your cash flow and ensure that it remains sustainable. You need to balance the ratio between your income and your debt acquisition. By keeping track of your expenses and credit use, you’re able to recalibrate and adjust your spending.
A good credit score could earn you opportunities to save more money on interest rates and get the best lending terms moving forward. So start practicing money management and aim for a good credit score. To begin building better financial habits, check out our other articles here on Finance and Markets.