What is the average Credit Score
The nature of the credit reporting industry is one of comparisons. Your credit score ultimately has the most meaning to lenders as a comparison of you versus the rest of the population. So what is the average credit score? And what does it mean to have a score which is above or below the average?
Average credit score in the United States
The American average credit score is approximately 720. Keeping this in mind, an individual who has a credit score of 700, slightly below average, will still be considered low risk by most lenders. This individual will probably receive favorable interest rates on their loans and other credit facilities. If you have a credit score above 750, well above average, you would be considered a much lower risk and will be charged the most favorable rates of interest prevalent in the market. Credit scores above 750 would also be scrutinized less for documentation on employment and income verification.
This intuitively makes sense. The scoring formulas are very good predictors of an individual’s debt management patterns. So if you have a higher score, then you have kept your borrowing within your means and are not likely to exceed your capability to pay back loans. As such, the need to verify what you claim to be your employment and income becomes less urgent. Another important trait predicted by a higher than average credit score is that the individual has managed their debts wisely for a relatively long period of time. The average account age of all your debt accounts combined will be higher for people with higher credit scores.
At the other side of the spectrum, a credit score of 650 is often considered to be a bench mark for many lenders. This far below the average, this benchmark somewhat signifies the highest risk that prime lenders are willing to take. In other words prime banks will be hesitant to lend to people who are this far below the average credit score. This is not written in stone however, and many prime banks will still consider their options based upon their relationship and history with the potential borrower. Furthermore, there are many higher risk lenders who actually come into play when you have this sort of score. Keep in mind the golden rule however, the higher the risk is, the higher the interest rate will be. The higher risk lenders will also scrutinize the potential borrowers’ credentials more carefully. At this point they may ask for proof of income in the form of pay stubs and they will call the employer for verification.
Once the credit score dips below 650, you are a high risk and securing funds from prime lenders is usually not possible. The higher risk lenders will of course still consider you but their interest rates will increase even further. The lenders will also put other terms in their contract to secure themselves more and to guarantee their profit. For example, when a mortgage is advanced to someone in this score range, the lender may insist on also collecting municipal taxes along with the monthly mortgage payment and pay the city on behalf of the borrower. In this fashion the lender has further protected their interest in the collateral (the mortgaged property) by ensuring that they have first claims in the event of default. In most jurisdictions, the municipality would have first claims for back taxes and they could force the borrower into bankruptcy. By having the property taxes paid, the lender has eliminated the city as a first claimant if things go sour.
At scores below 600, it will be difficult to secure credit from lenders. This is especially true in the credit crunch after the sub-prime lending fallout. If you have a credit score below 600 then you should seek proper credit counseling to get your financial affairs back in order. Remember that you can get back on your feet; all you need is some help and guidance to get you there.
Average credit score in Canada
The average Canadian credit score is approximately 700. The significance of this average applies similarly in Canada as they do in the US as discussed above. One important distinction between the American and Canadian lending industries is that Canadian lenders are on average more conservative. This is from a historic perspective and it may well change as a result of the sub-prime crisis in America. Another distinction is that the offerings in Canada are less than the US. An individual seeking funds in Canada has fewer lenders to approach against the backdrop of a conservative lending climate.
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