Perfect Credit? You Don't Need It!
Perfect credit? You don't need it
The highest-possible FICO score is 850, but even people with the best credit don't usually exceed 825. Those last 25 points wouldn't save you money on a loan anyway.
You're one of the lucky ones in the financial pecking order: Your credit score is high. Really high. But what if you want perfection?
Get a hobby.
Having a high credit score is great. But the slight difference between very high and perfection just won't make a difference in your everyday life.
A credit score is your credit history at one point in time, reduced to a single number. One of the most popular credit-scoring models, the FICO score, can range from 300 (very bad) to 850 (solid gold). But don't expect to see many 850s walking around.
"It's very rare to be there," says Maxine Sweet, the vice president of public education with Experian, one of the three major credit bureaus. "I've never seen it."
Though it's theoretically possible to score 850, most high scores top off around 825, Sweet says. "You can't get much higher," she says.
From a practical standpoint, that's just as well, several credit experts say.
"There is no reason to go from 775 to 850 because you're still going to get the same rate," says Linda Sherry, a spokeswoman for Consumer Action, an advocacy group in Washington, D.C. (See how a high score saves you money.)
For those not hitting the high 700s and above, there's room for improvement.
How to boost your score
If your credit score is high but you still want to nudge it up a few more points, try these six tricks:
Use credit sparingly. Even if you pay off your balances every month, you may show a balance on the day your history is pulled for a loan, says Craig Watts, the public-affairs manager for Fair Isaac Corp., the company that pioneered credit scoring and developed the FICO score. Creditors like to see consumers using credit judiciously so that they know consumers will have no problems paying, he says.
Use a small fraction of your available credit. Credit scoring will examine how much of your available credit you're using and penalize you if the percentage is too high.
What's ideal? "As close to zero as you can get," Watts says.
The limit that creditors want to see is anywhere from 25% to 35%, depending on the formula (and whom you ask).
"A balance above 50% really begins to hurt you," says Steven Katz, a spokesman for TransUnion, another of the three major credit bureaus.
So keep it at 25% to be on the safe side. If you're shooting for that superpremium score, just remember: the lower, the better.
In years past, credit counselors told consumers to close accounts that they weren't using, especially if they were getting ready to apply for a mortgage or car loan. The reason was that it was believed that lenders were leery of people who could go out at any time and max out their credit, adding a large pile of debt to their obligations.
But the typical FICO score doesn't penalize you if you have large amounts of credit available, Watts says, although "some creditors could raise a few eyebrows."
Credit-scoring models will compare how much credit you have available versus how much you're actually using. If your percentage ventures too high, your score will take a hit. And if you close an account, you suddenly have less available credit with the same debt load, which increases the percentage of available credit you're using.
Don't carry a wallet loaded with cards. The people with great scores don't use credit as much, and they treat it differently than the rest of us. So if your dream is to get that score up so that you can get every store credit card in town, you may have just solved the mystery of why you're score isn't in the correct stratosphere.
"People with sky-high credit scores apply for credit much less often than average, which is about twice a year," Watts says.
A stack of credit cards "may impress your neighbor, but it won't impress your lender," says Gail Cunningham, the vice president of business relations for Consumer Credit Counseling Services of Greater Dallas.
Make every payment on time. Follow up to make sure the creditor notes that correctly on your credit history. If you've honestly paid on time but you get penalized for being late, call and clear up the problem immediately. Not only are those late charges expensive, but one late payment can lower your credit score severely.
"It can cause your score to dip as much as 100 points," Cunningham says. (In fact, little things like a single late payment harm a great credit score more than a bad one.)
View credit as a safety net. How you use credit and what you buy with it can be a big indicator of your creditworthiness. People with great scores know that credit is for certain purchases, such as for a home or a car. And credit cards are for expenses such as auto repairs or home appliances, which are necessary immediately but are difficult to pay for all at once, or for emergencies. But too many people "are using their credit cards to buy things that are ephemeral," Sherry says. "And that's just not a smart way to use credit." Before you use credit, decide whether it's good or bad debt that you're taking on.
One good tip: For those life emergencies, always use the card that offers the lowest interest rate, and never charge more than you can afford to pay off in three months, Cunningham says.
Look at your credit report. Some consumers mistakenly believe that pulling their own credit history will hurt their scores. Wrong. If you ask for credit and give permission for a potential creditor to see your report, your score will go down slightly because it's likely that you're looking to increase your debt load.
But if you simply pull your own credit history or purchase your score, it will have no effect on your credit at all. Actually, the result may be quite the opposite: If you use your report to improve your performance with credit or spot and correct mistakes in your report, pulling your history will lead to an improved score.
Consumers are entitled to at least one free report from each of the three major credit bureaus annually. Many consumer experts recommend pulling a different bureau report every four months as a way of keeping an eye out for mistakes and identity fraud.
Though it pays to cultivate a good credit score, obsessing over the difference between excellent and perfect is a waste of time.
"A good chunk of people have a high score," Cunningham says. And getting there "is really just common sense."
Cunningham's advice: Pay your bills on time, keep those balances low, and take out credit only when you need it, not every time you want it.
"There may be something obscure out there, but if you do these main things, you will have good credit," she says.
This article was reported and written by Dana Dratch for Bankrate.com.