So you’ve got a credit score in the mid 600’s- what exactly does that mean? To help understand how this score is physically calculated we’ll walk through what factors are taken into account, what factors are ignored, and walk through some potential scenarios. We’ll also help in explaining the limitations of that medium credit score.
The typical range for FICO Scores
FICO (know as the Fair Isaacs Corporation) created the credit score to determine debt-worthiness (your ability to pay back loans). Strangely, the score isn’t ranged from 0-100 as a logical metric scientist might create, but rather the scale varies from 350-850. The median US score is approximately 695. Conversely, over 34% of US consumers are considered subprime (with scores below ~620) so the number is heavily skewed by both tails.
How the FICO score is calculated
Strangely, FICO keeps its internal score calculations proprietary, so its not possible to “calculate” your own score using the same methodology. There’s lots of speculation on how the algorithms balance competing factors as well as different “categorizations” of customers but most credit reporting agencies and FICO themselves agree that your score is determined based on:
- Payment History: Obviously someone who’s paid all of their previous debts on time is more likely to do so in the future. Your credit score is a reflection both of your previous repayments (did you pay it all back), as well as the timeliness (did you pay it all back on time). A missed payment, charge-off, or collection will all negatively impact your score.
- Utilization Rate: Someone who continually uses their credit-card maximums and credit line maximums is unlikely to be a good candidate to take on another loan. Ideally you keep your credit card utilization rate below 30-40% (if you have a 10k limit, use no more than 4k). Other loan types (student debt, home loans, car loans) may have different utilization factors.
- Total (known) Debt Outstanding: An individual who can barely pay their current loan installments is unlikely to repay a new loan. If you’re total student loan, mortgage, credit card, and auto loan payment make up a substantial portion of your take-home income, your credit score is likely to be lower.
- Credit History and Mix: Not all debts are created equal. Long term student loans or home loans are not factored as heavily as short term and high interest discretionary debt (credit cards, auto loans).
- Credit Checks or New Credit Issuance: Candidates who continually apply for new credit or have made excessive inquiries have lower credit scores.
To have a medium credit score (in the 630-680 FICO range) it likely implies one of some combination of the following may have occurred:
- You may be using too high utilization of your existing credit. For example with a credit card limit of $10,000 you may consistently float a balance of $7,500 to 8,500.
- You may have multiple previous minor delinquencies. One late car payment, and two delayed credit card statements for example. Even an unpaid parking ticket sent to collections could have impacted your collections.
- You may have a high debt:income ratio. You’ve just graduated from law school with $112,000 in loans and your entry-level legal position pays $55,000. To a potential lender, they’d prefer a lower ratio of debt:income.
What is included and what’s not:
So what included in the items used to calculate your score? For the most part the only items included to calculate your FICO are your credit report, as well as publicly available information.
Your credit report will contain all open “lines” of credit. These are accounts or inquiries setup by lenders, as well as any public collections (please note parking tickets, citations, or any activity or account thats proceeded to “collections” is generally reported and available here). One of the important things to note is what’s not included in the report:
- Any non-accredited loans (pawn shops, Buy-Here Pay-Here auto loans, etc).
- Any family or informal lending
- Any peer-to-peer lending made (lendingclub, etc)
One of the best resources for reading through a credit report and learning more actually comes from Canada.
What are the implications of having a medium credit score:
A mid-tier credit score will likely increase your overall costs of borrowing, and restrict you from certain unsecured loans.
How you can improve the score:
Luckily – we’ve written a lot about that here!