When it comes to credit scores, there is a lot of information to absorb. What are they? How do they affect you financially? What is a “good” score? What is the highest credit score available? Should everyone be striving to achieve a perfect score?
This article will explain how your credit score is calculated, how you can improve your score and if it’s necessary to have a perfect credit score. So what is the highest credit score possible? The two most popular credit scoring models today remain VantageScore and FICO — and the highest score possible for both of those is 850.
- What Is a Credit Score?
- How Is Your Credit Score Calculated?
- Do You Need To Have the Highest Credit Score?
- How To Improve Your Credit Score
- High Credit Scores Can Indicate Great Financial Health
What Is a Credit Score?
Simply put, a credit score is a three-digit number that potential creditors use to assess how likely you are to pay your bills. Scoring models look for patterns in your credit report data that historically have been associated with payment default. Based on the prevalence (or absence) of these patterns, scoring models assign you a score that reflects your predicted riskiness relative to other consumers.
Although there are many different scoring models out today — some of which take into account alternative data, such as your income or how you handle your recurring monthly bills — the FICO and VantageScore models remain the most popular among lenders.
Both the FICO and VantageScore models have bands for scoring, which you can see below:
|FICO 8 Scoring Bands|
The first company to release credit scores was Fair Isaac Corporation in 1989. It standardized the results from the credit reporting agencies.
In 2006 Equifax, Experian and TransUnion, the three major credit bureaus, launched their own credit score, called VantageScore. It has similar scoring bands to FICO but includes slightly different information.
|VantageScore 3.0 Scoring Bands|
Federal law entitles you to receive a free credit report from each credit bureau once every 12 months. This can help you ensure all of your information is accurate and up to date. In addition, some credit card companies now enable customers to view their free credit score online as part of their available account information.
Explore: How To Build Credit
How Is Your Credit Score Calculated?
Your credit score is calculated from your credit report information, which includes the amount of debt you carry, how long your credit history is and how promptly you pay your bills, among other factors. A higher score translates to a more dependable borrower, which inspires confidence in potential lenders — and lower rates.
Although the FICO and VantageScore models calculate your score a bit differently, they both use the same data in your credit report, which is all about your behavior concerning borrowing and repaying money.
How Your FICO Score Is Calculated
Your payment history is the No. 1 factor in a FICO score, and it accounts for 35% of your score. The next-biggest factor is your credit utilization rate — how much of your available credit you’re using — which counts for 30% of your score.
A tip: To avoid lowering your score, it’s recommended you use not more than 30% of your total available credit.
How long you’ve had credit counts for 15% of your FICO score. Your credit mix — the variety of loan types you have — counts for up to 10%. Recent applications for credit can influence your FICO score up to 10% because when you apply for credit the lender will make a “hard inquiry” (requesting your credit score), which typically lowers your score by a few points.
Although FICO doesn’t assign percentage weights to certain information on your credit report, keep in mind that derogatory information such as foreclosures, accounts in collections and bankruptcies can cause your score to take a nosedive.
To quickly grasp how much weight FICO assigns to each category, see below:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New credit: 10%
How Your VantageScore Is Calculated
The VantageScore scoring model evaluates credit along the lines of how FICO does but characterizes their importance differently. Like the FICO model, the most influential data in your score is your payment history. The type and age of credit you have and your credit utilization ratio are “highly influential.”
Your total balances and debt are only “moderately influential” and your recent applications for credit and available credit are “less influential. Note that your VantageScore will also take a severe hit from derogatory information.
The VantageScore 3.0 model weighs your data like this:
- Payment history: extremely influential
- Age and type of credit: highly influential
- Percentage of credit limit used: highly influential
- Total balances and debt: moderately influential
- Recent credit behavior: less influential
- Available credit: least influential
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Do You Need To Have the Highest Credit Score?
Would it be nice to have an 850 credit score? Of course — not only would you have bragging rights, but you’d also likely gain access to the best rates available from lenders.
But do you need to have the highest credit score? No way. Instead, you want to shoot for the highest “band” possible. For example, if you have an 800 FICO score, you’ll still be in the “exceptional” category. If your VantageScore is 750 you’ll be in the “excellent” band.
Even among the most disciplined consumers, few achieve the highest credit score possible. In fact, less than 1.5% of Americans are able to attain an 850 credit score, according to FICO. Even then, credit scores change all the time, so it’s not likely that any one person is maintaining an 850 FICO credit score at all times.
Striving to get the best credit score you can is a worthy pursuit. You might be surprised at how many ways your credit score can influence your life. It goes beyond just getting good terms on a loan.
A low score can actually cost you money. For instance, companies you deal with on an everyday basis — utility companies, insurers, cellphone providers — might check your credit score and levy certain fees or charge you higher rates if you don’t look like a good borrower.
A low score can also affect where you live. Say you found a fantastic apartment and the landlord did a credit check and saw that you don’t pay your bills. Your low credit score will decrease the likelihood of a landlord renting to you.
You can even get your credit card account limit reduced or closed if your credit score bottoms out. Your credit card company would also likely decline a request for a lower annual percentage rate or credit line increase if your credit is less than ideal.
Rather than push for the highest credit score, aim instead for a credit score range. If you have a score of around 800, you’re in the end zone: You’re likely to receive the same interest rates and preferred treatment that you would get if your score was a perfect 850.
Being in the “800 Club” is something to brag about, so if you want to reach for the stars, go for it — but don’t let backfield emotions lead the way. Although it’s possible to obtain the perfect credit score, you don’t need it to receive the top benefits. Your score is not entirely in your control, so keep this in mind and you can focus less on striving for perfection and more on enjoying all the things your responsible actions have afforded you.
How To Improve Your Credit Score
Don’t settle for an average credit score. A really high score isn’t impossible to get. The way to improve your credit score — and work toward a perfect 850 credit score — is in these seven steps you can take right now:
- Always pay your bills on time.
- Eliminate derogatory accounts from your credit report.
- Keep old accounts open to maintain a long credit history.
- Keep your outstanding revolving debt to less than 10% of your credit limits.
- Maintain a diverse mix of credit accounts.
- Extend credit lines by opening additional credit card accounts — but keep your balances low.
- Be sure to check your credit score — and your credit report — every three months and report any errors.
Improving your credit score is a matter of building healthy financial habits and keeping your debt-to-income ratio low. Katie Ross, education and development and housing manager for American Consumer Credit Counseling, a nonprofit that educates consumers on identity theft, credit, debt and budgeting, offered a few key tips for consumers looking to improve their credit scores.
You should 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.
Don’t get into the habit of making minimum payments. “If you pay only the minimum, it will take a long time to pay off your debt,” Ross said. “For example, if you owe $5,000 on an account with 18% APR, making 2% payments will take over 44 years to pay off. Also, you will have paid $12,431 in interest.”
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,” Ross said.
Finally, 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.
High Credit Scores Can Indicate Great Financial Health
A high credit score can gain you access to the best lenders and the best rates available.
It can also make or break your qualification for just about any line of credit, including a credit card, car loan or mortgage. If you want to borrow money, you need to prove you can handle credit and pay it back on time. Think of every time you pay your debts as a touchdown and you’ll be in the right frame of mind to set up an effective financial game plan.
Lenders use dozens of credit scores to measure consumers’ creditworthiness, so make sure you know yours. You should, because it has a significant impact on your financial standing. If your score is low, remember that it’s never too late to start rebuilding your credit.
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