FICO credit scores take five financial factors into consideration. The two most important factors are a person’s payment history and the amounts owed on their accounts.
Young people can be at a disadvantage simply because they do not have the depth or length of credit history as older consumers.
FICO scores range from a low of 300 to a high of 850—a perfect credit score which is achieved by only 1% of consumers. Generally, a very good credit score is one that is 740 or higher.
Keep in mind, these are averages based on a limited sampling of data, and many individuals’ credit scores will be above or below these averages for a variety of reasons.
The Experian National Credit Index study helps explain how the behavior of certain age groups can affect average credit scores. The study found that people in the 18-39 age group had the greatest number of late payments during the previous 12 months; that the 40—59 age group held the greatest amount of debt; and the 60+ age group had the lowest average credit utilization (used the least amount of credit that was available to them).
A credit score is a number that helps lenders evaluate a person’s credit report and estimate his or her credit risk. The most common credit score is the FICO score, named after software developer Fair Isaac Corporation. A person’s FICO scores are provided to lenders by the three major credit reporting agencies—Experian, TransUnion, and Equifax—to help lenders evaluate the risks of extending credit or loaning money to people.
Conversely, a person with a low credit score, assuming he or she qualifies for the same $300,000 mortgage, may pay 5.39% on the loan, with a corresponding monthly payment of $1,683. That’s an additional $285 per month, or $102,600 over the life of the mortgage, for the person with a lower credit score.
A person’s credit score affects his or her ability to qualify for different types of credit and varying interest rates. A person with a high credit score may qualify for a 30-year fixed-rate mortgage with a 3.8% annual percentage rate (APR). On a $300,000 loan, the monthly payment would be $1,398.
FICO likes to see established accounts. Young people with several years worth of credit accounts and no new accounts that would lower the average account age can score higher than young people with too many accounts, or those who have recently opened an account.
We break down credit scores by age to see what your score should be and how it will affect your major purchases.