The average credit score in America is now 710 according to Experian. Back in 2019, the average credit score was 703.
In other words, during a global pandemic, the average American improved their wealth and their financial health. Not only has the average credit score in America improved, the average saving rate has also improved as well.
When the U.S. saving rate surged in 2020 to a high of 32%, so did lending standards. Now in 2023, the U.S. saving rate is back to around 5%.
Lending Standards Are Tight
During a previous mortgage refinance in 2019, my loan officer said that he hadn't worked with a borrower with under an 800 credit score in over two years. I was surprised to hear this because I clearly remember banks offering the best refinance rates when you had at least a 760.
At the beginning of my refinance process, the mortgage officer asked whether I had over an 800 FICO score. I told him I thought so. But I felt like I had been caught in a lie because I didn't know for sure.
However, if I had said “no,” I felt like he would have hung up on me. He gave me this “you better not be wasting my time” vibe.
With the mortgage industry even tighter today thanks to so much demand, borrowers must really have their financial ducks in order to get the best rate.
For those interested, let's review the fundamentals of the credit score.
Credit Score Range And Fundamentals
Your credit score ranges between 300 – 850. Therefore, the average credit score should be somewhere around 575-600 if the scores are equally distributed. But they are not.
If your score is between a 300 – 579, you're probably never going to get credit due to some type of non-payment you made in the past.
If your score is between 580-669, your rating is fair, but you're still considered a subprime borrower. As a landlord who checks credit scores, I've seen doctors right out of medical school with scores in the low 600s due to massive debt and a short credit history.
It's only after you get over 700 are you considered an attractive borrower. In the past, the magic number was 720 or above. Today, it seems like the average number has shifted to 740 or above.
For more detail, take a look at the FICO score ranges by Experian, one of the big three credit agencies. The average credit score in America can be divided into five score ranges.
Factors That Affect Your Credit Score
We obviously want the highest credit score possible in order to get the lowest borrowing rate and the most amount of credit possible.
You also need at minimum a 580 FICO score to get an FHA loan with the ability to put down only 3.5%. If you have under a 580 FICO score, you need to put down 10%. The more down the better I say.
The FHA government program seems irresponsible to require so little down.
Here are all the factors that affect your credit score.
- Payment history for loans and credit cards, including the number and severity of late payments
- Credit utilization rate
- Type, number and age of credit accounts
- Total debt
- Public records such as a bankruptcy
- How many new credit accounts you've recently opened
- Number of inquiries for your credit report
The most important factors in your FICO score are your payment history on loans and credit cards, total debt, and the length of credit history.
Not considered in your FICO score analysis is your race, color, religion, national origin, sex or marital status, salary or occupation, or where you live. It's the same law when you are deciding on a prospective tenant.
The Average Credit Score Over Time
Now that we know some credit score fundamentals, take a look at the average credit score over time according to Fair Isaac Corporation (FICO). As Experian just reported, the average credit score is now about 710.
Are you impressed with your credit score improvement or what? While the chart makes the improvement appear like a San Francisco historical home price chart, in actuality, there's only been a 3.5% increase since the bottom in 2009 (686 to 710). Either way, I'm impressed the average American is now wealthier and financially more responsible.
The trend is our friend!
Since the financial crisis, banks have become very picky about whom to lend to. For example, I was rejected for a refinance back in 2015 because I didn't have two years of 1099 (freelance income) history despite having a large number of assets.
Always refinance before you leave your job. Once you lose a W2 income, you become dead to banks. You will likely need to show 5X more assets than the amount you are trying to refinance before a bank will be willing to refinance.
Average Credit Score By State
Below is an interesting look at the average credit score by state.
It looks like folks in Washington, Oregon, Vermont, New Hampshire, Massachusetts, North Dakota, South Dakota, Kansas, Utah, Colorado, Minnesota, and Iowa have the highest average credit scores. I'm impressed with Minnesota at 720.
On the other hand, residents in the South don't seem to be as financially responsible. Perhaps warmer weather makes people less motivated? 658 for Mississippi and 661 for Louisiana is pretty low. Then again, Hawaii is always warm and has a credit score of 705. Therefore, perhaps borrowing and paying back money is a cultural thing.
Average Credit Score By Mortgage Origination
Below is the latest mortgage originations by credit score. Notice how those with a 720+ dominate.
With stronger lending standards, low mortgage rates, and a large increase in home equity since 2009, it's hard to envision another housing market crash similar in magnitude to the one that occurred between 2007-2010.
Let's say you put down $200,000 on a $1,000,000 home in 2012. You locked in a 10/1 ARM at 3.25%. Since then, your property has appreciated to $1,500,000. Meaning you've got at least $700,000 in equity if you didn't take out a HELOC and spend it.
Further, your income has increased from $170,000 to $215,000 and your liquid net worth and pre-tax investments have increased from $250,000 – $600,000.
Even if your $1,500,000 home declines by 30%, it's still worth $1,050,000, or $50,000 more than what you bought it for. You're certainly not going to suddenly stop paying your mortgage and allow the bank to confiscate your remaining $250,000+ in equity with a foreclosure.
New buyers could get smashed if there's a correction and they need to sell. However, new buyers today are more creditworthy than buyers of the past. They are more likely to follow my 30/30/3 rule for home buying as well. Therefore, it's very hard to see a cascade of foreclosures like before.
My Credit Score Just Made It To The Top Level
I was worried that I was telling an untruth when my mortgage guy asked for my credit score. But, I really didn't know for sure. I just assumed it would stay above 800 since the last time I tried to refinance in 2015.
However, it looks like my credit score just squeaked by at 804 back in 2019 when I refinanced my previous primary residence. Today, I assume my score is still above 800.
Your Credit Score Won't Stay Static
What I find interesting about this latest credit score is that it actually went down one point since 2013 when I first wrote about joining the 800 club. There is no secret handshake. But there is a peace of mind you're always going to get the best terms with lenders.
Perhaps the credit score decline has to do with me paying off my rental condo in 2015 and paying off $815,000 of mortgage debt in 2017 after I sold my rental home. Hard to say because like a Lannister, I always pay my debts.
The other interesting thing about this credit report is that it says the scores range from a low of 334 to a high of 818, instead of a range of between 300 – 850. Equifax has a slightly different credit score range than Experian and TransUnion.
An 800+ Credit Score Is Your Goal
Finally, even though I got an 804, it still only ranks higher than 86 percent of U.S. consumers. This is a bullish indicator for the economy and the real estate industry. I thought a 804 would be at least in the top 5% for credit scores.
If someone like me who always pays his bills on time and has seen a healthy net worth increase since the financial crisis is still outranked by ~14% of Americans, then surely America as a whole is doing well. Go USA!
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