You May Actually Be Punished By Lenders If Your Credit Score Is Too High

by Hank Coleman

You may not get the best deal on a loan if your credit score is so good that it is almost off the charts.  It sounds counterintuitive, but having a very high credit score can actually hurt your chances of borrowing more in the future.  Banks and other lenders are in the business of lending credit to risky customers in order to maximize their profits while minimizing their risk.  It is a fine line that banks must balance between risk and reward, and often there is not a lot of reward for low risk, high credit score customers.

The Fair Isaac Corporation is the developers of the FICO credit score, the most widely used score by lenders.  The score tries to quantify and determine the amount of risk borrowers pose for default and nonpayment of loans.  Your FICO score can range anywhere from a horrible 300 to an unbelievably good 850.  While everyone strives for a great score by paying off their debts on time, paying at least the monthly minimums each month, having a balance of the different types of debts, the length you have had loans and credit available to you, and having a low percentage of credit utilization, the best debt repayers with FICO scores of over 800 do not make the best customers for banks and other lenders.  Still sounds crazy, right?

Banks make their profits by loaning money and getting it paid back to them on time and with interest.  They make the most profits off of their loans by being able to charge a high interest rate.  People with 800 FICO scores, of course, pay the lowest interest rates available.  And, in this sense, high scorers are not the best customers.

Who Does This Affect?  So, who has a credit score nowadays of over 800?  It is usually people in their 40s or 50s who have decades worth of long credit histories.  The best scorers also have paid off almost all their debts including their homes.  Financial guru, Dave Ramsey, often says that a high credit score is nothing more than a score of who uses debt the way lenders want.

So, What Does This Mean?  The highest FICO scores may not receive new credit offers.  The preapproved flyers in the mail may soon dry up if they haven’t already.  If there is a finite amount of funds to loan, there will come a time when banks and other lenders will limit their lending to high scorers just like they have limited lending to low scorers.  There is a greater profit margin in the middle with moderate risk individuals.  High scorers will, of course, not be turned down for credit, but lenders will not seek them out either.  Don’t get me wrong.  I am not advocating shirking on a few of your debt obligations just to score in the sweet spot of great lending offers (750-800).  But, like many good things, there is a unintended consequence that we all need to think about as we strive to score an 850.

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{ 2 comments… read them below or add one }

Kyle July 16, 2009 at 8:35 am

I don’t quite fit your demographic as I am under 30 with An over 800 score. I like the thought of lenders not seeking me out, in fact I prefer it that way. I have not had a problem getting credit but I don’t see much benefit in having a high score vs the mid range. Like you said the lenders want the sweet spot so they don’t I
prove rates much over that 750 mark.

elementaryfinance July 21, 2009 at 12:03 am

A bad Fair Isaac credit score (FICO) can increase the amount of interest you pay on certain loans by as much as 5%? I didn’t know that until I wrote an article on my website about it. It’s important that we keep our FICO score high!

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