Do you know your credit score? According to research, nearly a quarter of Americans have no idea and never check it, even though it could affect the loans they get.
The world of credit scores is challenging because understanding every single detail takes time. Plus, it’s fraught with misinformation.
In some cases, what you’d assume would actually be convenient is not, and vice versa. Completely ignoring the number might sound tempting to avoid issues.
However, taking time to understand the intricacies of credit scores is crucial, particularly if you want to get a good number.
The good news is that a good credit score can save you money over time. Therefore, you should know as much as you can about the topic!
What Is a Credit Score?
Whether you want to rent an apartment, borrow money, or open a utility account, you’re asking financial institutions to trust your ability to pay your bills on time.
Landlords and lenders won’t call every single one of the credit card issuers you’ve had to ask if you’re responsible and make payments. Instead, they’ll pull your credit score.
Your credit score is the number that summarizes your financial life. It’s a figure of three digits that represents your history of borrowing money and paying it back.
The higher your credit score is, the more creditors will think you’re trustworthy.
Some people scoff at the idea that their financial life is just a single arbitrary number. However, a poor credit score means you’ll probably pay higher interest rates when getting loans – that is if institutions approve them at all.
In other cases, institutions may ask for you to pay upfront when opening accounts, even if it’s just to pay for your cell phone. It can also affect your credit limit and many other aspects of your financial life.
The dream apartment you’ve always wanted? Well, the landlord will more likely give it to someone with better credit.
On the other hand, a good credit score means you’re able to pay your fees, so you get to borrow money at the lowest rates.
Score vs Report
Your credit score and report are not interchangeable. They’re two separate items, and understanding what each of them stands for is essential.
The three most important credit bureaus — TransUnion, Equifax, and Experian — collect your information and put it together on a credit report.
Your report includes significant information about yourself, such as your full name, your Social Security number, credit limit, address, loans, credit accounts, bankruptcies, and liens.
Currently, you can get a free credit report from all three credit bureaus. Therefore, you can check how your overall finances are going.
Companies will use the information on your credit report and calculate a credit score, which they share with lenders, banks, and other organizations.
Since there are numerous bureaus, you get multiple reports and different credit scores.
FICO Score vs. VantageScore
Some people don’t believe it, but you have dozens of credit scores. However, institutions don’t create or use them all equally.
FICO is a data analytics company, and it’s the most reputable source of credit scores.
The company produces a credit score using the information it finds on your reports. Since each bureau independently collects and reports your data, your FICO score will be different among them.
Plus, the FICO brand also offers various models depending on the person’s needs. Mortgage applications are completely different from credit accounts, for instance, so scores may vary according to that as well.
Even though FICO is the most popular credit scoring model, it’s not the only one. VantageScore started over a decade ago, and it was supposed to be a competing alternative.
Many lenders use VantageScore nowadays, but it still has less market share than FICO.
Why You Should Aim for a Fantastic Credit Score
Having a good credit score could influence a lot of what you can do. Some of its advantages include car insurance premiums and better card interest rates.
Overall, credit scores are a result of information on your credit reports, and a higher number means healthy finances. It could be the key to enjoying the following benefits:
Get Better Car Insurance Rates
In some cases, insurance companies use your credit score to make decisions about the coverage they offer.
According to the Consumer Financial Protection Bureau (CFPB), insurers can use your credit report to decide whether or not they should approve your application and how much they’ll charge you.
After you’re a customer, insurance companies can consider your credit score for deciding whether to give you premiums or not. In some cases, they rely on the information to deny the chance of renewing your policy.
Also Read: What is the Gift Tax Limit 2023?
Save on Other Insurance Types
Companies that offer other kinds of insurance look at your financial history too.
It happens because insurance companies may look for similar information when deciding whether to grant you premiums or not.
Insurers may look at your history and factor in on-time bill payments, as well as your debt. What companies learn about your credit score could help them determine how much you’ll pay in premiums.
Qualify for Lower Interest Rates on Your Credit Card
Issuers will most likely check your credit score when you apply for a card.
If you have an excellent credit score, you may be eligible for different things, such as a lower annual percentage rate, also known as APR.
The CFPB describes APR as how much you pay for borrowing money. At the same time, the Bureau says that a good credit score is always convenient to determine your payments because issuers offer the best alternatives to people with the highest scores.
When upgrading or applying for a new credit card, your score could also play an important role.
Get Higher Credit Limits
You now know that a good credit score allows you to get lower interest rates on your cards.
However, it could also help you get higher than the credit card limits.
An excellent credit score is also essential if you’re applying for bank loans, for example. To lenders, it’s a sign that you’re a convenient risk, so they’ll be willing to give you more money.
Have More Housing Options
Where you live could immensely impact your quality of life. A good credit score can help with this as well.
When you apply to rent an apartment, landlords may check your credit history.
Furthermore, a good credit score could also aid you in getting a mortgage for a house and lower your interest rate.
According to the CFPB, the better your credit score, the more likely it is you’ll get convenient options for your mortgage loan rates.
Get Utility Services Faster
When you set up accounts for utilities, such as your internet service or electricity, your credit score may also be essential.
The Federal Trade Commission says that it’ll be easier for you to get utility services if you have a good credit score.
Plus, an attractive credit history may mean that the utility company doesn’t require a security payment.
Buy a Cellphone Without Prepayments or Security Deposits
Getting the highest credit score possible is also critical when you’re buying a new cellphone.
If you have poor credit and payment history, you may have to deal with upfront costs.
Look Better to Potential Employers
Lastly, an attractive credit score is beneficial when you’re applying for a job. Potential employers might look at your financial history as part of the background check.
It is possible to get a job if you don’t have a perfect credit score. However, potential employers might consider that bankruptcies and late payments are red flags.
Breaking Down Credit Scores
Credit scores are essential because they allow financial institutions to tell whether or not someone is responsible and correctly organizes their financial life.
Different factors make up your credit score. If you want to achieve perfection, you have to take care of each one. Check them out:
Payment History
Payment history is the most important component, and it contributes 35% to your FICO score.
In most cases, if you make a late payment, it will stay on your credit report for seven years, while a Chapter 7 Bankruptcy can remain as long as 10 years.
Fortunately, as time progresses, the effects of late payments on your credit score minimize.
Although it may stay on your credit report, the effect of it on your FICO score will lessen over the years.
Utilization
Contributing 30% to your FICO score, utilization is the credit-to-debt ratio, often represented expressed as a percentage.
It refers to the credit you’re using compared to the one you have available.
A high credit utilization means you’ve used more credit than is available, and lenders could consider you a risk.
Credit History
It makes up 15% of your FICO score. The length of your credit history includes several factors, such as the following:
- How long you have had credit accounts open.
- The age of your oldest account.
- The time that passed since opening your latest account.
- The time since you used each of your accounts.
A longer credit history provides more evidence of worthiness, which is a great indicator for lenders to assess before issuing loans.
Various factors could affect your credit history too. Here are some of the most critical ones:
- The severity of the late payment: How late the payment was and how much you owe affects the outcomes you get. The more you delay paying and the greater the amount, the more negatively it will impact your credit score.
- Frequency of late payments: Isolated issues don’t have much of an impact on the credit score. However, consistently having problems paying when it’s due is a sign of financial mismanagement, which can affect your ability to take out loans in the future.
- Type of account: There are different kinds of credit accounts, and they have various levels of impact on your credit score. Paying your credit card bills later than the due date will have a greater impact than delaying utility bill payments, for instance.
- Age of late payment: Having an old late payment won’t influence your credit history that much. Alternatively, score models consider recent financial activity more critical, so you should avoid missing recent payouts.
- Overall credit history: Your credit history affects how much late payments change your scores. If you have a really strong credit history and only a few negatives on your credit report, a single issue would not impact your outcomes as much as it would a person with negative marks in their background.
New Credit
It contributes 10% to your FICO score and refers to the new accounts you’ve opened, as well as any recent inquiries you’ve made.
In most cases, you’ll get new credit after hard inquiries, when lenders or other financial institutions review your background.
Mixed Credit
It makes up the remaining 10% of the FICO score, and it consists of the diverse range of credit you have.
Having mixed credit, for example, auto loans, mortgages, credit cards, etc., could be convenient since lenders usually think it’s positive.
There Are Different Types of Credit Scores
In the United States, there are different types of credit scores. On the one hand, FICO has issued different versions of its scoring model.
Furthermore, different companies may give you various scores. It’s why sometimes lenders will care more about your payment history, credit card balances, credit utilization ratio, house and car loans, and any other essential information instead of just looking at the score.
Industry-specific Scores
FICO scores are also industry-specific. In addition to the ‘general’ number, you also get a score for each of the following:
- Credit card balances
- Auto
- Mortgage
- Personal finance
- Installment loan
Industry scores don’t follow the classic model, so you may find a perfect credit score of 900.
Even though scores can vary, they’re usually very close. Also, just because there are a few industries that sometimes use specific scores doesn’t mean they will do it all the time.
On the contrary – in some cases, industries prefer using FICO scores.
Different Bureaus
Each industry has various editions of scoring methods and also offers different credit scores depending on the agencies applying them. The three major bureaus are Equifax, TransUnion, and Experian.
Therefore, you could have your ‘general’ FICO Experian credit report, your ‘auto’ FICO Equifax, and so on.
How Many People Have a Perfect Credit Score?
Only 1.6% of Americans who get a FICO score have a perfect number.
Calculating credit scores is possible and could be helpful if you want an idea of where you stand.
Some people do it because they want a better credit limit.
However, others just want to achieve a stellar credit score to enjoy all the benefits, including paying fewer interest rates and having more alternatives.
Overall, a good credit score tells institutions that you’re responsible. It could go so far as to affect your ability to get a job, so the best alternative is to work on it if you’re young.
An 850 score is immensely challenging to get. Fortunately, you don’t need it, even if you want all the benefits.
A score of 760 will grant you access to the best mortgage rates, and with 720, you’ll get fantastic auto car loan options as well.
Generally, instead of obsessing about getting a perfect credit score, you should try to aim for something between 720 and 760.
Five Tips to Get a Perfect Credit Score
Even though you don’t need a perfect credit score to get the best options, some people still try to get it.
Keep in mind that a good credit score is much more attainable, and you could still get the same benefits with a 760 or an 850.
The free credit score calculator backs this up – it shows that the best interest tier goes for people with 760+ credit scores.
If you still want to get a perfect credit score, here are five tips to achieve it:
Your Payment History Must Be Impeccable
The first thing lenders look at when deciding whether to give you loans is your payment history.
Your chances of getting convenient alternatives may go down if you have bankruptcies, liens, late payments, collections, and judgments on your credit report profile.
If you’ve never missed payments, delinquencies could cause so much as a 90 to 110-point drop in FICO scores.
Therefore, climbing to the mid-800s may be almost impossible if you have red ink on your payment history reports.
Negative marks stop affecting credit scores over time, but if you’re aiming for perfection, it won’t be possible if you have a less-than-impeccable history.
However, even with negative marks, you can still obtain a good credit score.
The key to getting the best FICO score is that there must be some time between the present and your previous negative marks.
Lastly, you’re in a different situation if your report is full of negative marks. Someone with one or two hiccups may have better chances of getting a good credit score.
Utilization Has to Be Low but Not Too Low
You’ll never have a perfect credit score if your utilization rate is high.
People who want perfect FICO scores usually aim for something between 2% and 4%.
There are no rules, but achieving perfection when it comes to FICO scores requires a lot of effort. Even then, you may not get the best outcomes.
Overall, having some credit utilization is more convenient than nothing.
Reports show that people who have a small credit utilization ratio often get better FICO scores than those who have zero.
Credit Mix Is a Contributing Factor
Many people don’t factor in credit mix because it’s 10% of your credit score and is often the least important aspect.
However, not taking it into account could cause you to lose a few points and say goodbye to the perfect credit score you’ve been aiming at.
In practical terms, the credit mix is essential because FICO says that you need a variety of loans to earn a perfect score. The different types of credit are the following:
Installment Credit Lines
You usually pay a specific monthly amount when it comes to installment credit lines. Eventually, you take care of an entire balance due. Common examples of this are:
- Student loans
- Personal loans
- Auto loans
- Home loan
Revolving Credit Lines
With revolving credit lines, you can get a credit limit to use at the pace you want to.
Some examples of this are credit cards, personal loans, and trade lines.
Open Lines of Credit
In this case, you get an unspecified amount of credit, usually monthly. You’ll have to pay the full balance each month.
Many open credit lines don’t appear on your personal credit report unless you miss a payment.
However, other open credit lines do appear on your report, such as charge cards.
The Ratios You Need for Mixed Credit
Unfortunately, the ratio you need on your credit accounts to maximize your mix is not clear. Nonetheless, having one of each type of loan probably helps a lot.
Generally, the number of credit accounts you have is often not as significant as having experience managing different types, either currently or in the past.
Consequently, if you only have installment loans or revolving credit accounts, you most likely won’t be able to achieve a perfect score.
Credit History Is Essential
Even though history is only 15% of your overall score, it’s still essential to achieve perfection.
Reports have said that the average history length for someone with a perfect score is 30 years.
Therefore, getting a perfect history requires time and a lot of effort.
You probably can’t get a perfect score if you have a few years of history, even if your record is impeccable.
Generally, history is not worth obsessing over. If you’re young, you’re probably years away from getting a credit score for a mortgage loan, so you shouldn’t worry until the time comes. Just pay on time and build up your background.
New Credit Could Be a Drawback
Depending on how high your credit score is, you’ll typically see a drop if you apply for credit.
Therefore, you shouldn’t have recent inquiries on your credit report if you want a perfect score.
The impact of inquiries diminishes after 90 days and disappears after a year, so it most likely won’t drop you too much below the perfect score if you’re already there. A few months later, you’ll probably be back on top.
A pro tip is to open small business credit cards if you want to maintain your perfect score. In many cases, they won’t show up in your personal report.
Frequently Asked Questions
What Is a Perfect Credit Score?
The perfect credit score is 850 in both FICO and Vantage models, which range from 300 to 850.
However, other credit score model alternatives could go up to 900.
How Many People Have a Perfect Credit Score?
Sources report that 232 million people have FICO scores, but only 1.6% achieve 850.
How Low Must Utilization Be for a Perfect Credit Score?
There is no specific number, but to get the highest credit score, you should aim for a 2% to 4% credit utilization ratio.
How Much Credit History Do You Need to Get a Perfect Credit Score?
According to a 2011 study, the average history length for someone with the highest credit score was 30 years.
Do You Need a Perfect Credit Score to Get the Best Rates?
You don’t. With a score of 760 or higher, you’ll most likely be able to get the best mortgage interest rates.
What Should You Do if an Inquiry Appears on Your Credit Report?
If you don’t want inquiries to hurt your credit score, you should avoid them. They’ll make it drop for about five points, even though they disappear in time.
To prevent your score from dropping, limit your applications and use prequalification tools to shop around.
Final Words
Obtaining a perfect credit score is an ambitious goal. However, its utility is questionable.
Generally, the most convenient option is for you to manage your credit score in the best way possible. Keep your debt low, make payments on time, don’t go over your credit limit, and avoid new inquiries.
To get a shot at a perfect credit score, you’ll need credit accounts with years of history (preferably without negative marks) as well as revolving and installment lines.
Plus, you must also have a mix of credit and a low credit utilization ratio.
A very small percentage of people get perfect credit scores. Therefore, most aim for the best they can.
Even though some want a FICO score of 850, you don’t need it to get the best alternatives when it comes to auto and mortgage loans. You’ll get the latter with 760 points and the former with just 720.
Therefore, the best you can do is ‘shoot for the moon, and even if you miss, you’ll land among the stars.’
A good credit score shows institutions and potential employers that you’re able to make payments on time and be responsible with your finances.
In this case, good credit scores are just as convenient as achieving perfection!
About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He's also a published author, and his views on investing have been featured in USA Today, Tech Times, The Huffington Post, Nasdaq, and many more.
