Regarding credit scores, higher numbers often get the spotlight. You'll hear stories of people boasting about their perfect 850 score as if it's a golden ticket to financial freedom. But is that perfect score necessary to reap the benefits of excellent credit? Not really, according to industry experts.
The Mid-700s: The Sweet Spot of Credit Scores
A senior industry analyst at Bankrate suggests that achieving a mid-700 credit score generally opens the door to the most favorable loan terms and credit card rates. Once you reach the mid-700s, your credit is deemed excellent, and there's no tangible advantage to having a higher score. Any score beyond that is merely for boasting.
What Does a High Credit Score Get You?
If your FICO score, the metric most lenders use to evaluate creditworthiness, falls between 740 and 760, you're likely already getting top-tier interest rates and offers. These scores usually qualify you for the best terms on credit cards and auto loans, and a 760 score should get you prime rates on mortgages.
Here's how FICO score ranges generally break down according to Experian:
Poor: 300 – 579
Fair: 580 – 669
Good: 670 – 739
Very Good: 740 – 799
Exceptional: 800 – 850
Every Point Counts, But Only Up To A Point
While it's true that every additional point can make a difference, especially when you’re straddling the line between fair and good or good and excellent, the impact diminishes as you move up the scale. For example, with mortgage rates, If you have a 675 score, you might qualify for a $300,000 mortgage at a 7.5% interest rate, costing you $36,000 more in interest over 30 years compared to a 700 score at a 7% rate.
The Right Way to Boost Your Score
Contrary to popular belief, maintaining a credit card balance from month to month doesn't help your credit score; it only costs you interest. What does help is keeping a low credit utilization rate, the ratio of your credit card balance to your credit limit.
For instance, if you have two credit cards with $6,000 limits each, giving you $12,000 in available credit, and you carry a $3,600 balance, your credit utilization is 30%. Financial gurus recommend keeping this rate below 30% to show lenders you’re adept at managing debt.
Pro Tips to Lower Your Utilization Rate
- Pay Down Debt: Lower your balances to improve your utilization rate immediately.
- Ask for a Credit Limit Increase: This can also lower your utilization rate, but be cautious as this may temporarily hit your credit score due to a hard inquiry.
The Long Game
Improving your credit score is more like a marathon than a sprint. Consistent strategies like timely bill payments and low debt levels may yield little results but can eventually help you reach your desired credit score.
So the next time you find yourself envying someone's 850 credit score, remember: once you’re in the mid-700s, you’re already in the golden zone. Anything above is simply a feather in your cap.
Please contact us if you have questions about how your credit score impacts your financial plan.