Why Having a Perfect Credit Score Is Overrated
There’s no such thing as perfect — except when it comes to your credit score. There, we have a precise number for perfection: 850. Pretty dang high, right? It is when you consider that the average FICO Score in the U.S. is 711, while the average VantageScore is 688. And yet, we hear it all the time in the world of personal finance, student loans and real estate. It’s like a taunting mantra: “You must have perfect credit… You must have perfect credit…” But how important is a perfect credit score? Is it worth building our financial lives around?
In short, the answer is no. Having a perfect credit score is overrated, so you may as well stop striving for that towering 850 figure, which, for most, is unattainable.
Experts Consider a Score Above 780 To Be Excellent
“The two primary reasons that a perfect credit score is overrated is that reaching the 850 level provides little benefit to the individual, and attempting to take advantage knocks you from the lofty perch,” said Kevin Haney president of Growing Family Benefits and previously an executive with Experian. “An 850 score gains no advantage over someone at the 800 level – 50 points lower. Experts consider a credit score above 780 to be excellent. Most consumers with ratings in this range garner the best borrowing terms (lowest interest rates) and cheapest insurance premiums (auto and homeowner).”
In other words, most lenders and insurance companies do not differentiate offers in a meaningful way to people with excellent scores — the top 20%.
Most Lenders Are Cool With a ‘Good’ Score of 700 and Above
“In many instances having a good credit score (700+) will reap the same benefits as having a perfect credit score, including securing low rates on loans and larger loan amounts,” said Kalicia Bateman, mortgage specialist at Best Company. “Yes, you might secure even lower rates on your mortgage or car loan with an 850 credit score, but the difference between that score and a score in the 700s is likely much smaller than you think.”
Bateman stressed that it’s more important to simply have a credit score than to have a perfect 800-plus score. Without one, you won’t be able to borrow money or make large purchases or show lenders how responsible you are with debt and making on-time payments.
“But, you don’t need to bend over backwards to make your credit score perfect,” Bateman said. “Your money could be used or invested in better ways than spending more on a credit card or taking on unnecessary debt.”
Once You Take Out a New Loan, Your Credit Ceases To Be Perfect, Anyway
If you do manage to obtain a perfect credit score of 850, bear in mind that your perfection may not last very long.
“If a person with an 850 score takes out a new loan, they stop being perfect immediately,” Haney said. “First, a hard inquiry will knock about 5 points off their score right away at the bureau furnishing the credit report used by the lender. Then the extra account reported by the lender will hurt two sub-factors at all three agencies:
- The average length of history will be shorter.
- The new credit activity will be higher.
The Algorithm Determining Perfect Credit Is Antiquated
“An out-of-date algorithm is used to calculate credit scores,” said Cameron Miller, a real estate expert. “They aren’t very good indicators of a person’s level of risk. If you make a mistake when you’re 18, you’ll have to pay for it when you’re 25. Getting a new credit line will hurt you more than it will help you. A single late payment will leave a permanent blemish on your record. It is far too difficult for young people to obtain credit. It’s not a perfect system by any means. It has flaws and is unjust.”
Some Lenders Will Work With a Much Lower Score
The main reason we tend to obsess over having perfect credit comes from a smart place: We want to be as eligible for loans as possible. And while it’s true that a perfect credit score can better help you secure the maximum loan, a lesser one won’t obstruct your path to lenders — it will likely just make your interest rate higher.
“Not all lenders charge an identical rate of interest, nor do they all lend to identical borrowers,” said Kunal Sawhney, CEO of Kalkine Group. “Multiple lenders lend to borrowers with FICO scores below 670. It’s because not every borrower with an excellent credit score comes with a guarantee of timely repayment, and not every borrower with a poor score comes with a guarantee of default.
“Indeed, borrowing becomes a little costlier when the credit score is in fair or poor categories,” Sawhney continued. “At such times, assess your debt-to-income ratio and check if you can comfortably service debt at a higher rate. Interest rates have no fixed rationale, and they are shaped by multiple forces like economic growth rate and inflation. Today, when the government is undertaking a multi-trillion-dollar stimulus program, and the Fed has kept benchmark rates at near-zero, lenders will be ready to give loans on not-very-high interest rates to even those with a poor credit score.”
The Pursuit of Perfect Credit Can Be Costly in Other Ways
Aiming for a perfect credit seems like an astute financial pursuit, but it can be more trouble than it’s worth — and costly to your overall well-being.
“Striving for a perfect credit score poses its issues as there is no financial flexibility,” said Kalleigh MacCormack, a personal finance expert and editor at creditcardGenius. “In addition, [it] can feel limiting and draining, which could take an emotional toll on you; however, if you have a good credit score (above 750), there is no need to stress to improve it, as it is only added pressure to reach 850.”
And as the saying goes, none of us are perfect, and we should let that maxim apply to our financial stature, too. Just like the humans holding them, credit scores can have flaws and still get by just fine.
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Last updated: July 19, 2021