Obtaining the highest credit score possible is an objective that was handed to consumers decades ago. In order to qualify for just about any line of credit like a credit card, car loan or mortgage, you need to show that you can handle the credit extended to you and pay it back on time.
The closer you are to the perfect 850 credit score, the better your chances of qualifying for bottom-line rates. Here’s what goes into your credit score and what you can do to get the highest score possible.
What Is a Credit Score?
How Your Credit Score Is Determined
To build strong credit, you must know how credit scores are generated. In general, there are five elements that factor into your credit score. Each have a different amount of influence.
Payment History (35 percent): Your payment history provides a snapshot of your reliability as a consumer and borrower. This includes your credit card, car and mortgage payments. It also looks at whether you have defaulted on other bills, have had an account sent to a collection agency or have been sued for delinquency. Bankruptcies and foreclosures fall into this category, as well.
Your Debts (30 percent): This examines how much credit you’ve been extended versus how much you’re using. Credit bureaus use something called a credit utilization ratio to measure whether you’re using too much credit. According to the ratio, you shouldn’t owe too much on your revolving credit, but you also can’t owe too little. Tracy Becker, credit expert and president of North Shore Advisory, said that “keeping aggregate balances at 7 percent of aggregate limits on revolving credit gives consumers higher scores.”
Length of Credit History (15 percent): The longer your credit history, the more trustworthy you can look as a borrower. Keeping an old line of credit open and active shows you are reliable, predictable and have a habit of keeping accounts in good standing.
Types of Credit You Use (10 percent): If you can successfully manage different types of credit, your credit score can see a boost. Becker explained that “having many old and active accounts, which include installment credit, revolving credit, mortgages and lines of credit” will provide you a healthy mix of credit types.
New Credit You Take On (10 percent): Opening too many lines of credit at once raises red flags for credit bureaus and lenders. If you are shopping around for the best loan rates and terms, however, a few queries in a short period of time won’t be detrimental to your score.
How to Obtain and Keep the Highest Credit Score Possible
Improving your credit score is a matter of building healthy financial habits. One of the easiest ways you can improve your credit is by rethinking your spending habits and how you manage debts. Katie Ross, education and development manager for American Consumer Credit Counseling, a non-profit that educates consumers on identity theft, credit, debt and budgeting, offered these tips for consumers looking to improve their credit scores:
1. Avoid using your credit card if you’re in a financial bind.
“Finance charges and other fees will add to your debt burden,” Ross said. However, even using your credit card when times get tough is preferable to a home equity loan.
2. Don’t get into the habit of making minimum payments.
Minimum payments might ease the burden off your monthly budget, but if you make a habit of only paying the minimum, you’ll pay a lot more over time. On this, Ross said:
“If you pay only the minimum, it will take a long time to pay off your debt. For example, if you owe $5,000 on an account with 18% APR, making 2 percent payments will take over 44 years to pay off. Also, you will have paid $12,431.00 in interest.”
3. Make your payments on time, every time.
Paying off your debt might be difficult, but avoiding payments won’t make your life any easier. “Bad problems get worse fast when you have late fees and higher rates to pay during financial difficulty,” she said. But if you miss a payment by accident or have a good excuse, she recommended calling your credit card company to have your late fee waived.
4. Don’t max out your credit cards.
“A credit card account close to its limit will cause a big drop in your credit score,” she said. Maxing out your account also puts you in danger of getting hit with over-limit fees.
Financial Tips From the 800 Club
Bridget Cramer entered the 800 club at age 31. From a young age her parents encouraged her to avoid taking on unnecessary debts. “My parents raised me to pay with everything in cash and wouldn’t even teach us how to utilize the mortgage option in monopoly,” she said. Even with credit cards, she avoids carrying balances month to month unless she has a zero interest rate. More importantly, she said:
“I never finance anything without a plan to pay for it.”
In short, a strong credit score takes strong discipline and a commitment to healthy financial habits. Here are some ways you can manage your money like a pro:
While obtaining a credit score of 800 or more takes time and a bit of effort, the hardest part of getting a high credit score is maintaining it. 800 club members constantly have to calculate how much they spend when using credit cards, fret over whether to allow any inquiries on their reports and even contemplate whether they should temporarily stop using credit cards so that new loans won’t hurt their credit utilization ratios.
Is an 850 Credit Score Possible?
Even among the most disciplined consumers few achieve the highest credit score possible. In fact, only about 0.5 percent of Americans are able to obtain an 850 credit score, according to FICO. Even then, credit scores change all the time, so it’s not likely any one person is maintaining an 850 credit score.
Any adjustment made to a credit profile, from buying a new car to opening a new line of credit, can cause a sudden drop. And if your credit card issuer decides to lower your available balance without you knowing, your credit utilization ratio can be thrown off.
Is Pushing for the Highest Credit Score Worth It?
Aside from the ego boost, a higher credit score has numerous benefits. However, because much of the credit and reporting process is out of your hands, you could be looking at a lot of regular homework to maintain your highest possible score, especially if you have less-than-stellar financial habits.
That is why some experts advise you not to worry about trying to achieve the top credit score. Instead, it’s better to think in terms of a credit score range. If you have a score of around 780, you are likely to receive the same interest rates and preferred treatment that you would get if your score was a perfect 850.
Of course, being in the 800 club is something to brag about. If you want to reach for the stars, go for it. Just know that while it is possible to obtain the highest credit score, you don’t need it to receive the top benefits. You should also be aware that your score is not entirely in your control. This way, you can focus less on striving for perfection and more on enjoying all of the great things your responsible actions have afforded you.