Your credit score could make or break your chances of getting a mortgage loan. So it’s important to know where you stand, before you apply for a loan.
There’s nothing wrong with being average, per se. But when it comes to your FICO credit score, being average means you probably won’t get the best mortgage rates. That’s because the average credit score in the U.S. is too low to qualify for the best interest rates.
Depending on who you ask, the average credit score in the U.S. is somewhere between 670 and 690. I actually found several different averages when researching this story. I got one number from FICO, the company that designed the FICO credit-scoring model.
I got a different number from Experian, which is one of the three credit-reporting companies in the U.S. And I found even more averages reported in various news sources. So let’s say the “average of averages” is around 680 on the FICO scale.
Average FICO Score Falls Below “Excellent”
Some perspective would be helpful at this point: FICO credit scores above 640 are generally considered good, while those above 760 are considered excellent. A credit score below 640 is considered fair to poor. If your FICO score is in the 500 range, you’re part of the “bad credit” club. Again, these are general numbers. If you ask 20 mortgage lenders to define excellent, good and bad credit scores, you’ll probably get 20 slightly different sets of numbers. But they’ll probably be close to the numbers above.
So, by this definition, the average credit score in the U.S. fall into the good-but-not-excellent range.
According to the most recent U.S. Housing and Mortgage Trends report by CoreLogic, credit-score requirements have risen sharply over the last few years. Their data shows the following:
- In 2010, 60% of conventional mortgage loans originated in 2010 had a FICO credit score of 780 or higher.
- In 2005 (during the housing boom), only 25% of originated loans had FICO scores of 780 or higher.
You could interpret this data in two ways: (1) consumers as a whole have improved their credit scores, or (2) lenders are rejecting people they’ve approved in the past. The second scenario is the accurate one. Lenders have raised the bar, and a higher percentage of borrowers are simply being turned away.
When you consider the average credit score in the U.S. (and the type of score that’s needed to get the best rates), one thing becomes clear. Most Americans will not qualify for the best mortgage rates being offered. They might qualify for a mortgage loan, and that’s certainly good news. They just won’t get the lowest rates the lender has to offer. They will pay a premium for being average.
Credit Score is One of Several Criteria
This is not to say that anyone with a credit score above 760 is going to get the best mortgage rate. Lenders look at a variety of factors when reviewing a loan application. They will consider the size of the down payment, the borrower’s debt-to-income ratio, and other factors. In order to qualify for the best rates on a mortgage loan, you’ll need to have all three bases loaded. You’ll need a down payment of 20%, a credit score in the mid-700 range or higher, and a reasonable debt-to-income ratio.
How to be Above Average
So what can you do if your FICO credit score is average, or below average? There’s really no mystery to it. In fact, if you do a Google search for “how to improve my credit score,” you’ll see the same advice repeated over and over. Pay all of your bills on time. Reduce your credit card balances. Clean up any errors on your credit reports. And don’t open any new credit accounts unless you absolutely need them.
People who make it seem more complicated than this are probably trying to sell you something. Don’t buy it. You can do these things yourself. In fact, you’re the only person who can do them.