A perfect credit score – a unicorn in the credit world. The highest score a consumer can achieve within the FICO and VantageScore system.
A perfect credit score is 850 (FICO) and only 1.2% of Americans have this perfect rating. Based on a range from 300 to 850 (FICO), most lenders consider anything higher than 720 to be excellent credit.
The good news is you don’t need a perfect credit score to access the best terms and lowest interest rates.
How Do Credit Scores Work?
Your credit score provides information to companies and lenders that shows your current debt, bill payment history, and other financial information. Your score helps lenders determine if they want to approve you for a line of credit and what the credit terms of the loan will be.
It provides these companies with information to assess the likelihood that you can pay off the debt you accumulate. Employers, rental property management companies, and insurers, can also utilize credit to gauge your ability to manage debt obligations.
What Is a Credit Score?
Your credit score is a number that third parties use to assess their risk of loaning you money. FICO is the most common system to measure credit in the United States, although there are other credit agencies like VantageScore.
Because FICO is the most common, we will continue to use it as an example. FICO will score your credit somewhere between 300 to 850.
The higher your score, the better. You can determine your score by five major factors: credit history length, new credit, debt burden, payment history, types of credit.
How To Monitor Your Credit Score
If you’re interested in checking your score yearly, you can utilize AnnualCreditReport.com and receive a free copy of your report. It will include information from the three major credit bureaus: Experian, TransUnion, and Equifax.
However, if you to check your credit more frequently, there are other tools available. For example, Experian allows you to access your credit report and credit score for free on their website. Equifax also allows you to get six credit reports for free each year.
Your credit card company or bank may also provide you with a credit monitoring system. This can be on your statement or online. Check with your institution to determine if you have access to this service.
Why Having a Good Credit Score Is Important
While you can survive with less than ideal or even bad credit, it comes at a steep price. You can be turned down for needed loans, denied rental opportunities, or face extremely high interest rates.
With a good credit score, you will almost always qualify for the loan or credit card you are applying for, typically with the best interest rate. It also allows you to have negotiating power.
Imagine you are ready to purchase a new car. If you have bad credit, most lenders will not work with you or charge steep interest rates.
Your options for selecting a vehicle will be very much diminished and you will likely have to take what you can get. But with good credit, you can select the car you want, find the best loan terms that work for you, and use your credit as bargaining power to take advantage of special offers.
How To Build Credit
Building your credit can be a complicated task. When you reach adulthood and have no credit history, making it hard to get approved for a credit card, loan, and even an apartment.
The first thing you should do is to start establishing a credit history. You can do this one of two ways.
The first way is to get a secured credit card (a card initially backed by a cash deposit). The second way is to get a credit-building or secured loan.
This type of loan has one purpose – building credit. Usually, the money that is borrowed is held in an account by the lender until the loan is repaid.
What Information Do Credit Scores Not Consider?
While your credit score provides lenders with detailed information about your financial history, it does not consider the following: your race, religion, national origin, age, sex, marital status, salary, occupation, geographical location.
How To Improve Your Credit Score
There are many factors that come together to determine your credit score. To improve your credit score, you will need to address the factors that are causing your score to be lower, which will help you show lenders you are not a financial risk.
Certain factors of your credit score are more impactful than others. The two main ones are your payment history and your credit utilization ratio.
If you address issues within these two factors your credit score will improve over time. But please note, there is no overnight fix to improving your credit score. It takes time, effort, and patience.
Make On-Time Payments
When a future lender looks at your credit report and history, they will be gauging whether you are reliable enough to pay off your debt. Past payment performance is typically a good predictor of future payment performance, which is why it is vital to make all your payments on time.
Up Your Credit Line
A great way to improve your credit utilization ratios is to increase your credit line. By increasing your credit line, your credit utilization will decrease, helping improve your credit score!
Don’t Close Credit Card Accounts
If you have credit card accounts that you are not utilizing, but they are not costing you money, it is an ideal strategy to keep them open. Closing credit card accounts can increase your credit utilization ratio, which can impact your credit score in a negative way.
Work With a Credit Repair Company
Working with a credit repair company can help you address your outstanding debt and create a plan that removes negative markets on your credit report. When you utilize the services of a credit repair company they will work on your behalf with all three credit agencies and negotiate with your creditors.
Make Sure There Are No Negative Marks on Your Credit Report
If you review your credit report and notice negative remarks on your credit (collections, bankruptcies, etc.) begin working to pay off your debts. As each negative mark is removed, your credit score will increase.
If you choose to overlook the negative marks, just remember that negative accounts can stay on your credit history for seven years and bankruptcies up to ten years.
Credit Score Factors: How Your Score Is Calculated?
As mentioned above, your credit score is calculated based on five major factors including payment history, debt burden, length of history, credit type, and new credit.
Payment history accounts for 35% of your credit score. It is the single largest component of your score because it provides lenders with insight on how you behave in regard to your debts.
Unfortunately when you pay all your debts on time, your credit does not necessarily increase. Instead, if you do not pay your debts on time you will be penalized by a drop in your credit score.
Making payments that are late will be reflected not only within your credit score, but also on your credit report. They will be marked 30 days late, 60 days late, or 90+ days late.
A single missed or late payment may seem trivial, but it can be damaging.
Total Amount Owed
The total amount you owe accounts for 30% of your credit score. You will not be immediately marked as a high-risk borrower if you owe money on your open accounts.
But if you are utilizing all of your available credit, it can appear that you are overextended. You will need to find the right balance of money owed on your loans and credit obligations.
This is why you should consider keeping unused credit cards open. It will decrease your credit utilization, making your total amount owed look better.
Length of Credit History
The length of your credit history accounts for 15% of your total score. Typically, the longer your credit history, the higher your score will be.
The length of your credit history includes how long you have established credit accounts, the average age of your accounts, the length of each specific account, and the last time you used certain accounts. The longer you have established credit history, the easier it is for a lender to judge your behavior toward your future credit obligations.
Your credit mix accounts for 10% of your total score. There are various types of credit that can appear on your account: credit cards, mortgages, finance company accounts, retail accounts, and more.
Your FICO score will consider all the different types of credit and debt you have. Having history to different types of debt is a good indicator that you can manage different financial products appropriately.
However, you are not required to have a line of credit from every available option.
New credit accounts for 10% of your total score. Opening numerous credit accounts within a short period of time can indicate a higher risk, even more so when a person who has a short credit history.
Moreover, it is best to avoid opening too many new accounts in short succession.
To Get a Perfect Score, Practice Good Credit Habits
The time and effort that it takes to build the perfect credit score requires good habits and patience. Having a history of on-time payments, the proper mix of credit, along with a trusted credit history can help you reach this goal.
However, you do not have to try and tackle it alone. You can turn to your financial advisor to assess your current credit situation and outstanding debt, then create a plan to help you reach your credit score goals.