According to the latest data released by myFICO.com, the average FICO credit score in the United States is 689. So, how good (or bad) is it to be "average" when it comes to credit?
For example, can an average-credit borrower actually qualify for the low-rate car loans we've all seen advertised? Or can someone with an average score actually obtain a mortgage with a decent interest rate? And, what about getting a good credit card?
Here's what average credit will get you, and why it's so important to work for the best credit score you can get.
Buying a house
The good news is that even with an average credit score, homebuyers can get a rather competitive mortgage rate. As of this writing, an average FICO score should get you a 30-year mortgage rate of about 4.16%, which is not too far off from the 3.76% rate the top tier of borrowers (760 FICO and up) can get, according to myFICO.com.
On a $200,000 mortgage, this is the difference between a $973 and $927 monthly payment, which is significant but not prohibitively so.
The bad news is that even with an excellent FICO score, it can be tough to get a mortgage loan right now. According to the Ellie Mae Origination Report, the average score for an approved purchase loan was 755 in August 2014. And more shockingly, the average score of a rejected loan was 723, which is well above average.
The problem is that mortgage lenders look very closely at other areas of your application, particularly your debts, income, and employment status. If your debts are high relative to your income, it could pose a serious obstacle. And, lenders want to see a solid track record of employment, meaning at least two years of constant employment in the same occupation.
And, although there are loan programs that allow low down payments, expect to put down the standard 20% unless your credit and other qualifications are well above average.
Buying a car
When it comes to buying a car, your score has a much bigger impact on the interest rate you can expect to pay. Borrowers with FICO scores above 720 can expect to pay just 3.32% APR on a 60-month new car loan. And even though the average score is just 31 points lower than that, a 689 will more than double the interest rate to about 6.76%.
And the difference between the 720-plus range and the average score is even more dramatic for used car loans (3.56% vs. 7.55%). On a 48-month used car loan, an average-credit borrower can expect to pay about 115% more interest, so the difference is indeed significant.
Car loans are perhaps the easiest type of credit to get right now. In fact, The Washington Post even referred to the recent surge in subprime car lending as a "bubble." However, for lower-credit borrowers, interest rates can shoot up rapidly.
What kind of credit card can you expect?
Much like car loans, there is a credit card out there for just about anyone. There are even credit cards designed for consumers with extremely damaged credit history.
However, in order to get a "good" credit card, you'll need to have a pretty high credit score. Good credit cards have (relatively) competitive interest rates and reward you for your purchases. They also have either no annual fee, or a fee that is easily worth the cost when you factor in the benefits of having the card.
The website Credit Karma lists the average credit score approved for most major credit cards, as well as the lowest score they know of that has been approved. And, there are forums where users share their individual experiences.
In general, to get the best credit cards, you'll need a score well into the 700s. However, there are some decent cards to be had with an average credit score, For example, according to Credit Karma, the Chase Sapphire card has an average approval score of 699 and has approved consumers with scores as low as 670. And the card has a pretty good rewards program.
What an excellent credit score can get you
In a nutshell, life is not terribly difficult for those consumers with average credit scores. With an average score, you can still buy a house and a car, and have pretty good credit cards in your wallet.
However, excellent credit can save you tons of money over the long run. For example, let's say that you buy a house with a $250,000 30-year mortgage and a new car for $30,000. Over the life of the loans, you'll pay about $23,500 more in interest if your credit is just average than you would if you were in the top tier of consumers.
That's $23,500 that you could have put toward your retirement savings, or used toward your kids' college tuition. So, while you can buy all of the same things with average credit, working for the best possible credit score just makes good financial sense.