And is it really worth the effort?
3 minute read
Who doesn’t want to be perfect, right? If you walk into a singles bar, you want to be judged a “10.” When your boss gives you an annual review, you want to see “Consistently exceeds expectations.” And when you serve your significant other the classic cheese souffle over which you’ve toiled all afternoon, you want your sweetie to take one bite and gasp, “Perfect!”
When it comes to your credit score, however, perfect can be a big case of overkill. On the scale used by the Fair Isaac Co.’s FICO credit score – the granddaddy of all scores – lousy is 300, or what you’d expect if you were a hobo, and 850 is perfect, which goes only to those with absolutely impeccable credit records. But perfect is unnecessary.
Perfection is overrated
For most borrowers, a score of 720-850 is considered excellent, which will help you snag the best loan offers at the lowest rates. If you’re between 681-720, you’re good, and will still qualify for plenty of credit. So, in this case, perfection is overrated. Once your score is in the high 700s, any improvement in your score is mostly meaningless.
Think of it this way: A perfect SAT score for college applications is 1,600 yet, out of 1.7 million kids who take the test each year, just 300 are the type of unicorns who hit a perfect score. And yet, millions of kids still get into college even though they’re less than perfect. Same goes with your credit score.
With a credit score, lenders consider your history of using credit, your history of paying on time, how much credit you use and a few other factors that influence whether you’re a good bet to repay any money that’s loaned to you. Once you’ve established that you’re good on all those factors, you don’t need to be a financial Eagle Scout in order to get a loan.
In addition, if you’re shooting for a perfect score, you need to specify which one. There are dozens of commercially used credit scores that consider or ignore various aspects of your finances, such as paying rent and utilities on time, which gives younger borrowers and those with scant credit histories a better shot at being fairly evaluated. Beyond those standard scores, many large lenders use their own internally calculated scores, because what’s important to a mortgage lender isn’t as vital to a car dealer.
Perfect is possible
Nonetheless, you can achieve a perfect credit score. Last year, according to Bloomberg, Fair Isaac found that of the more than 200 million U.S. consumers rated with FICO credit scores, less than 3 million – a mere 1.4 percent or so – scored perfect 850s. And while it may not get you a better loan than if you scored 775, a perfect score at least gives you bragging rights. Besides, everybody needs a hobby and shooting for a perfect 850 is safer than taking up cliff diving.
To get to perfect, you’ll need to understand the important factors that go into a credit score and how they’re rated. While it’s going to vary from score to score, the structure of the classic FICO Score gives you a pretty good guide.
How Fair Isaac weighs your score
- Payment history (35%): One one of the most important factors in a FICO Score is whether you’ve paid past credit accounts on time. Eliminating late payments probably is the best way to boost your score.
- Amounts owed (30%): This includes how much you owe on different types of credit, but a big factor is your credit utilization percentage – the amount you owe in total and per loan as a percentage of your available credit. Most experts recommend keeping that level below 30 percent on any one card and in total for all your available credit.
- Length of credit history (15%): For the most part, the longer you’ve had credit the more it helps your score. That includes: How long your credit accounts have been established, including the age of your oldest account, your newest account and the average age of all your accounts; How long you’ve had specific credit accounts; and How long since you used certain accounts. One step you can take is to put some small, re-occurring charge, such as a subscription, on any unused accounts and have it automatically paid in full.
- Credit mix in use (10%): This looks at your mix of credit cards, retail accounts, installment loans, finance company accounts and mortgage loans.
- New credit (10%): Opening several accounts in a short period of time hurts your score, especially if you don’t have a long credit history.
All in all, a credit history that shows you use your credit regularly, but not for too much, in different ways and with stable, established accounts that you pay on time is going to be the key to approaching a perfect credit score. It’s not necessary to be considered a good borrower with excellent credit but, if it makes a difference to you, go for it.
Published by Debt.com, LLC