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If you’re looking for a new loan or credit card, you’re probably paying close attention to your credit score. The higher your score, the better your chances of landing a low interest rate and a credit card with beneficial rewards.
Many people see a perfect credit score as the ultimate achievement. But is it realistic? Here’s what you need to know about this lofty goal.
What is a perfect credit score?
When it comes to credit scores, it’s important to know that there isn’t just one credit score model; in fact, there are several, such as the FICO Score and VantageScore. Each model has its own unique scoring system but they both have the same credit score range — 300 to 850.
The percentages of people who achieve the top credit scores are relatively small. Just 20% of Americans have “exceptional” FICO scores, while 30% of Americans have an “excellent” VantageScore, according to credit bureau Experian.
FICO Score ranges
Why you should stop aiming for the perfect 850 credit score
Even if you maintain excellent credit habits, it’s unlikely that you’ll achieve a perfect 850 credit score and maintain it. That’s because your score can fluctuate over time.
“There are natural ebbs and flows in the credit score,” said Kim Cole, community engagement manager with Navicore Solutions, a non-profit credit counseling agency. “Everything that factors into a credit score can change on a daily basis. For example, if you charge something on a credit card, like a refrigerator or high-end item, it can affect your credit score because it affects how much available credit you have.”
The point of a great credit score is that it allows you to access lines of credit or loans at the best rates possible. But the truth is that you’re likely going to get the best rate possible once you are in the ‘excellent’ or ‘exceptional’ credit range no matter if you’ve got a 795 score or the ‘perfect’ 850, for example.
“Many lenders look at the range of credit, rather than an exact score,” she said. “In my experience, 770 and above is considered excellent credit.”
Instead of obsessing over the perfect score, aim to get your score into the excellent range if you can.
What it takes to get an exceptional or excellent credit score
Regardless of which credit score model you focus on, getting a perfect one is difficult. That’s because credit score models take into account several different factors, which means your score can change frequently. For example, FICO uses the following data to determine your score:
- Pay your bills on time: Your payment history accounts for 35% of your score. Making all of your payments on time is the single biggest contributing factor to your score.
- Keep your revolving balances low: If you are using a large amount of your available credit, you could hurt your score. The amount you owe makes up 30% of your credit score.
- Keep old accounts open: A longer credit history will boost your score. The length of your credit history contributes to 15% of your FICO Score.
- Don’t apply for lots of new credit in a short period of time: Opening up several new credit accounts in a short time can damage your score. The amount of new credit you open accounts for 10% of your credit score.
- Keep a diversified mix of credit: Lenders want to see that you’re capable of juggling several different types of credit, such as credit cards and loans. Your credit mix makes up 10% of your credit score.
To achieve excellent or exceptional credit, focus on making on-time payments.
“People need to be focused on paying their bills on time,” Cole said. “On-time payments are the biggest contributing factor. If you can be forgetful and miss payments here and there, it can be a significant hit to your credit.”
Setting up automatic payments and calendar reminders can prevent you from missing payments. Once you have a pattern of always making your payments on time, work on paying down any existing debt.
“Keep your balances on your credit cards as low as possible,” Cole said.
How much of your available credit you use makes up 30% of your score, so paying down debt will help boost your credit score.
What to do if your credit score is damaged
If you have poor credit or no credit at all, don’t despair. There are things you can do now to improve your credit.
- Pull your credit report: Review your credit report at least once a year. Look for accounts that are past due, as well as fraudulent activity. Mistakes can affect your score, so keep an eye out for any inaccuracies. You can access your credit report for free every 12 months from the three major U.S. credit bureaus (Equifax, Experian and TransUnion) at AnnualCreditReport.com.
- Get a secured credit card: Even if you have poor or no credit, you likely can qualify for a secured credit card. With a secured card, you put down an initial security deposit and make payments from it. Your payment history is reported to the credit bureaus.
- Apply for a bank loan: Consider applying for a small bank loan. As you make regular payments, your payment history will be reported to the credit bureaus, boosting your credit.
- Pay down your balances as quickly as possible: Keeping low balances across your revolving lines of credit like credit cards is one of the best ways to ensure a strong credit score. Focus on paying down debt quickly.
- Let time pass: Negative events fall off your credit report typically within seven years, and sometimes all you can do is let time go by in order to see improvement in your score. The good news is that if you flood your credit report with lots of new, positive behavior, that old negative behavior will begin to factor less and less into your score.
The bottom line
Your credit score has a significant effect on your financial life. It can determine whether you’re approved for a loan, and what interest rate you get. However, while your score is important, perfection isn’t always realistic (or necessary). Instead, focus on entering into the “exceptional” or “excellent” range for credit scores. By maintaining good credit habits, you can reap the benefits of an above-average credit score — without obsessing about the exact number.