A perfect credit score is a bit of an elusive target, as it is challenging to figure out the formula for impeccable financial health. But is the maximum number really necessary? And if so, how frequently do people achieve it? Even though lenders generally assure that anything over 700 is a good score, many people strive for the ultimate goal: 850.
After all, a credit score this impressive has countless benefits—it’s a sure sign that you understand how to manage your money and can borrow and spend with confidence. However, reaching that brag-worthy 850 takes more than just financial wellness. You also need a complete understanding of how credit works and the math behind what affects your scores day to day. In this guide, we’ll be answering questions like “what’s considered an excellent credit score?” and “what’s a great credit score?” to help you better understand what’s needed to achieve perfection. Keep reading to learn how to get an excellent credit score or use the links to answer your questions right away.
What is Credit?
Credit is what allows you to borrow money from lenders. When you apply for a loan, lenders will either approve or deny your request by assessing factors like debt-to-income ratio, employment history, and the amount of the loan. There are several types of credit, including revolving credit, service credit, and installment credit. We’ll go over the three types of credit below.
Revolving credit is a line of credit that you can keep using even after you’ve paid off the balance in full. With this kind of credit, you’ll have a limit to the amount of money you can use. For example, if a financial institution approves your credit card for $3,000, you’ll only be able to charge that amount to your account. Like any type of credit, you’ll need to make a minimum payment each month. If you only pay a portion of the amount owed, you’ll continue to revolve your debt until it’s paid off completely.
Service Credit is established by those who provide a service, such as utility companies, phone and internet providers, and gyms. Essentially, it’s an agreement between you and the company offering the service. Let’s take a closer look at gyms as an example. When you apply for a membership, you’ll sign a document that’ll guarantee the use of the facility only if you pay for the service.
Installment credit is a type of loan that’s used toward a specific purchase. For instance, mortgages, car loans, and student loans.
When thinking of opening a new line of credit, it’s important to take into consideration the type of credit you want to open.
Why is Credit Score Important?
So, why is credit so important? Well, maybe you want to buy a car in a couple of months. To do so, you need to apply for a car loan if you don’t have the cash in hand. Or you may be planning to purchase a house, which most people can’t afford to pay in full. When it comes to making these big purchases, you’re going to want to make sure your credit is in tip-top shape.
A credit score determines if a lender will approve or deny your loan, the interest you have to pay, and the amount due each month. The higher the credit score, the lower your interest and payments will be. The lower your credit score is, the higher your interest rate and monthly payments will be, meaning you’ll end up paying more for whatever you purchased in the long run.
But lenders aren’t the only ones interested in your credit score. Here are a few other people or organizations that take a look at your credit score before making their final decision.
- Landlords may want to know your credit score to ensure your finances are in good standing and that you can afford to pay rent.
- Insurance companies may use your credit score to determine the rate of your policy.
- Utility companies can also look at your credit score to see whether you’re eligible to open an account.
- Employers often run credit checks to make sure you’re going to be a trustworthy employee.
Your credit score is an essential factor for almost every aspect of your life, whether you realize it or not. A credit score allows you to make significant financial decisions without your wallet suffering the consequences. You’ll be able to spread the costs of big purchases over time, making it more manageable. But it isn’t enough to simply have a credit score. You need a good credit score to reap the benefits.
Credit Score Range
Credit scores range from 300 to 850. The number you see on your monthly credit report is generated by VantageScore or FICO. Each company has its own credit-scoring model to determine your credit score based on several factors, such as payment history, credit history, total debt, and more. Although the scores between the two may differ, they’ll generally follow the ranges below.
- Anything below 630 is considered a poor or bad credit score
- Credit scores between 630 and 689 is considered a fair credit score
- Credit scores between 690 and 719 is considered a good credit score
- Anything above 720 is considered an excellent credit score
So, what’s a perfect credit score? 850 is considered a perfect score. We’ll be discussing what is the highest credit score and how to reach it later on. Even though you may be content with having a good credit score, there’s always room to improve.
Excellent Credit Score
As mentioned, anything above 720 is considered an excellent credit score, but what exactly does that mean for you as a borrower? For starters, you’ll increase the likelihood of getting approved for the line of credit you want. You’ll also save money during the lifetime of your loan since your interest and monthly payments will be low.
An excellent credit score has numerous advantages for you as it increases your purchasing power and puts you in the best financial position possible. Once you reach this pinnacle of success, where do you go from there?
Perfect Credit Score
According to Nasdaq, roughly 1.2% of Americans had an 850 in 2020. The benefits of an 850 credit score may include lower interest rates, easier approval for home loans or rental applications, and even a greater chance of getting hired by your dream company. But is it essential to have a perfect credit score for these opportunities? Not necessarily. Anything from 790-719 is considered “good,” while 720 and above is an excellent score. However, there’s no harm in wanting to achieve perfection.
The path to reaching that rarely seen 850 score can seem a bit confusing. Even if you pay your bills on time, have a diverse collection of credit accounts, and maintain a clean financial record, many people plateau around the 750-800 mark. So how does one build enough credit to reach the ultimate score? Let’s go through some of the most common contributors to getting the highest credit score below.
What Affects Your Credit Score?
Before we explore how you can improve your credit score, you need to know what factors affect your credit score. If you’re set on achieving an 850 score, these determinants are important to take into consideration.
Multiple Hard Inquiries
Each time you apply for a new line of credit—whether it’s for a car, credit card, or home, for example—lenders perform what is known as a hard inquiry into your history. These are not to be confused with soft inquiries, which are made by prospective employers or lenders checking out your report for preapprovals. Multiple hard inquiries tell a story that may worry lenders.
If you choose to apply for a credit card, shop around to find the best one for you before a hard inquiry occurs.
Frequent Late Payments
On-time payments are essential to your credit score. You agreed upon a specific arrangement when you accepted a loan, and lenders would like to see that you can stick to it. However, some banks allow a pass for missing a payment by a few days once every one to two years; it’s crucial to stay on top of due dates the best you can.
History of Defaulting or Charge-Offs
When late or non-existent payments extend past six months, lenders may charge-off your credit account. This means that the bank no longer trusts you to pay the owed amount. These unfortunate notes can last between six and seven years on your credit report and may lead to lenders denying future applications for new lines of credit.
Closing Old Accounts
Remember that the length of your credit history accounts for a significant portion of your score. Just because you’ve paid off a tricky balance doesn’t mean you should close the card. If this were one of your earliest cards, your history’s length would shrink with the cancellation of your account.
Keeping it Simple
Even if you pay all your balances off each month, sometimes you may get stuck at a mediocre credit score. Reaching the highest credit score will likely require you to show off your credit knowledge. As you diversify your lines of credit, you’ll be able to prove your financial expertise. By only focusing on one line of credit—such as student loans or minimal credit cards— at a time, your credit score could plateau.
Achieving the perfect credit score is all about balance. It’s possible to get in your own way without realizing it. Check in with your finances if you’re falling into any of the common traps mentioned above that could keep your credit score stagnant. Not sure how to get your credit score for free? Mint makes it easy!
How to Raise Your Credit Score
If you’re only a few points away from reaching 850, it can get pretty frustrating seeing the number remain the same month after month. To help you reach your goal, here are five ways you can raise your credit score.
Make Timely Payments
There’s no question that making your credit payments on time each and every month is one of the most important factors for your credit score. This doesn’t necessarily mean that you can’t carry a balance on revolving credit accounts, but late minimum payments incur a fee and remain on your credit report. In the end, it all comes down to creating long-term trust with lenders.
Keep Your Utilization Rates Low
Some financial experts believe that carrying a balance above 30 percent of your credit limit can damage your credit score. Though this frequently quoted 30 percent is seen as the hard and fast rule for credit utilization, experts say it is actually a cap. Carrying a balance below this amount— preferably below 20%— is ideal for raising your credit score.
This is also a reminder that carrying a balance does not negate your chances of hitting that magical 850.
Only Open Necessary Accounts
Though account diversity can help perfect your credit score, opening accounts or cards you won’t use and that have burdensome fees and stipulations can hurt your credit. Only open lines of credit when you need them. However, if you’re tempted to accept your favorite retailer’s credit card offer, for example, be sure you can pay off each purchase in a timely manner.
At the same time, be mindful of closing accounts once they’re opened. Cutting up that credit card simply because you have a new account means lowering your overall credit limit and possibly increasing your utilization rate. A card with a long life also shows your dedication to maintaining the account.
Have a Long Credit History
It’s a little confusing to learn that you don’t begin your credit journey with a perfect score. Credit scores, however, are about building a credit reputation over time. It’s simply impossible to prove how you’ll respond to paying down debt until you do so over several years. If you’ve only just begun to build credit or have minimal accounts, your score will improve as you continue to follow your set payment schedule.
Cultivate Account Variety
Whenever you hear about someone achieving the perfect credit score, they often boast their wide range of credit accounts. Each line of credit opened speaks to a different type of spending. Things like student and car loans prove that you can pay off large sums over time, and revolving accounts, such as credit cards, verify that you’re able to manage your monthly budget with confidence.
Even different credit cards can offer a variety of perks. Some people may keep a credit card open for emergencies, while others could use it to accumulate travel points or store credit. When you see each line of credit as a unique tool, you’re more likely to approach credit spending with a healthy mindset. In turn, this shows up in your long-term credit report and helps your score grow.
Summary: How to Achieve Perfect Credit
The perfect credit score is achievable with a little strategy and plenty of patience. The ultimate number—a score of 850—is possible over time and with the proper financial knowledge. Most importantly, understand that credit scores can fluctuate as your life changes. Focus on your overall financial wellbeing and it may be within your reach sooner than you think.