Borrowers will of course receive the best interest rates on car loans, mortgages, and credit cards with a high credit score. The Fair Isaac Corporation is the creator of the FICO Score which is the single most important credit score used by creditors in America. FICO credit scores can range from 300 to a perfect score of 850. There is a great disparity in the interest rate borrowers are charged by having a poor, good, and great credit scores. But, is it really necessary to aim for perfection? Is the perfect credit score even possible or is it just another urban myth?
What It Takes To Have A Perfect Credit Score
While the exact details that make up your FICO credit score are proprietary, everyone has an educated guess on what it takes to earn the highest score. Here are a few of the most widely recognized tips that can help you achieve a credit score of over 800 points. Payment history is the single most important factor in determining your credit score. You have to pay all of your bills on time, every time. Another tip to keep a high credit score is to never charge more than 10% of your credit cards’ credit limits. This is your credit utilization ratio and a key factor in determining your credit score. So, for example, if you have a credit limit of $5,000 on your only credit card, you can have a balance no larger than $500 in order to maintain stellar credit.
What A Perfect Credit Score Will Get You
While many people think that perfect credit will allow them into a special club of incredibly now interest rates on car and mortgage loans, the truth of the matter is that there is not much difference between 850 and 760 points. There is no reason to stress out trying to increase your 775 FICO Score to a perfect score of 850 because you are still going to get the same interest rate. The table below is an example of what you could expect on a 30-year fixed rate mortgage where the homeowner borrows $190,000. The table shows each band of FICO Score rates and was created by the people who run the credit scoring system. This table can be found directly on the Fair Isaac website.
So, based on the fact that the Fair Isaac folks created this chart, you can be fairly confident in the fact that there is not much difference in credit scores that are between 850 and 760. So, the extra work to try for perfection may not be worth your time and effort.
Why A Perfect Credit Score Does Not Matter
If you have a score near 780, you are likely to receive the same interest rates and preferred treatment that you would if your score was a perfect 850. It is better to think of your credit score in terms of a range instead of shooting for just the top score. Having a perfect credit score is overrated. There is no single “score cutoff” used by all lenders, so it is difficult to say what a good FICO score. A good score is different to each lender who has their own criteria and cutoff ranges. For example, one car loan lender may offer its lower interest rates to customers with credit scores above 680 and another auto lender may use 720 as its cutoff criteria for its best loan rates.
There is a game being played between people who are obsessed with earning the perfect credit score and the companies that develop these scoring systems. While no one exactly knows what it takes to earn a perfect credit score, there are a lot of ideas floating around on what it takes. Nevertheless, it might all be for not. Like the quest for anything perfect, the perfect credit score may not be worth all of the fuss in the end.
(photo credit: Fair Isaac Corporation)
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