When it comes to your credit score, there’s no need to aim for a perfect score of 850. “Very good,” or a FICO score in the range of 740-799, can be good enough.
Your credit score is a number that lenders use to assess your creditworthiness, which impacts whether you get a loan and what kind of interest rate you're offered, explains certified financial planner Dave Alison, executive vice president at Prosperity Capital Advisors in Westlake, Ohio. Your credit score is calculated based on factors like whether you make payments on time and how much debt you have.
Scores start at 300 and can reach 850, the very highest score. There are different scoring models, but scoring brand FICO says the average American has a score of 704, putting them squarely in the “good” category. Experian estimates that just 1.2% of Americans have a perfect 850 FICO score.
The higher your score, the more likely you are to be approved for that auto loan or credit card — and the better the rate you’ll get. So, taking steps to improve your score ahead of applying for a big loan, like a mortgage, can ultimately save you thousands of dollars over the life of that debt.
But once you reach a score in the “very good” range, nudging that number even higher won’t result in noticeably better deals, says credit expert John Ulzheimer, who has worked for FICO and credit reporting company Equifax. And improvements top out when you reach the “exceptional” range, he says — your rates will be the same as someone with a perfect score.
So what makes for a “very good” score? That can vary by the type of loan you’re looking for. For example, FICO’s loan savings calculator estimates you’d be eligible for a lender’s best rates on a 36-month new auto loan if your score is at least 720. You would need at least a 760 for the best rate on a 30-year fixed-rate mortgage.
Once you cross the threshold of 760, lenders will generally consider you a favorable client and you'll likely be approved, says Alison. He recommends aiming for that score — don’t worry about pushing it even higher and trying to reach 850.
Earning a perfect 850 is out of reach for many people simply because they haven’t been using credit for a long time, Ulzheimer says. Length of credit history accounts for 15% of your score, he points out, and it takes decades to earn top marks on that metric. So if you want to see fast improvement, direct your energy to elements of your score that you can control:
Pay your bills on time. Your payment history accounts for 35% of your score. So set up automatic payments if you can for your credit cards and loans, to avoid the black mark of a late or missing payment on your record.
Limit new credit requests. Only apply for credit you need, he says—not to earn an extra discount at your favorite store. Requests for new credit account for 10% of your score.
Check your credit report. Your score is based on information in your credit reports , so make sure those are accurate. One in 5 consumers has an error on a credit report that could be dragging down their score, according to the Federal Trade Commission.
Paying down debt will also help improve your score over time, although that’s often easier said than done. Pick a debt repayment strategy you can stick to, so you can see your balances—and your score—improve over time.
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