DYK: Is chasing 850 a waste of time?
t’s no secret that having a strong credit score is one way to earn great deals from creditors. A high credit score means low credit risk, and lenders love those types of applicants. There’s also no shortage of online content that purports to teach consumers how they can improve their credit scores, to include obtaining the almost mythical perfect score of 850.
We’ve been told that an 850 credit score means unimpeded approvals, the lowest interest rates possible, and the highest credit limits, but is that really true? Do you really need an 850 in order to earn great deals from creditors?
No, Not Really
The answer is unequivocally no. You do not need an 850, or anything close to 850, in order to earn the best deals that a lender has to offer. While the perfect score of 850 is very impressive, it’s also unnecessary.
At some point along the credit score range of 300 to 850, there comes a point whereby you are seen as practically void of credit risk to a potential lender. That point isn’t at 850, but at a much lower credit score threshold. It’s that score threshold where you should be aiming to stay above.
What Does a Credit Score Actually Mean?
Every score that is calculated when you apply for credit tells a story about you. That story is expressed in what’s called your odds-to-score relationship, which indicates the likelihood that something will occur. That “something” is the probability you’ll go severely delinquent in the next 24 months.
A very poor score means your odds of going delinquent are unacceptable, which is why consumers who have poor scores are either denied or saddled with much higher interest rates. A very strong score indicates your odds of going delinquent are low, which is why consumers with strong scores are usually approved and given competitive rates and terms. This practice is formally referred to as risk-based lending.
You certainly do not need an 850 in order for lenders to feel comfortable that you’re going to pay your bills on time. This is why someone with an 850 doesn’t get better credit offers than someone with, say, credit scores in the high 700 range.
780 or Above Should Be Your Target
If you were to exclude student loan lenders, which almost always require a co-signer, the majority of credit issued in the United States is for automobiles, mortgages, credit cards, and business loans. Assuming you meet the lender’s various capacity and collateral requirements, a credit score of 780 or above is going to practically guarantee you the best deal any of those lenders have to offer. For those of you doing the math, that’s some 70 points from a perfect score.
In fact, there are some lenders that will offer you their best deals at 760 or even 720. However, while those scores may earn you a great deal, it’s not as universal as what you’re likely to experience at or above 780, which is why that should be your target score.
How Can I Get and Stay There?
This is the easy part. Anyone can earn and maintain scores at 780 or above. It’s not rocket science as some may have you believe. As long as you can do three things repetitively then you’ll hit or exceed 780.
First, you have to avoid negative information from hitting your credit reports. This means late payments, record of default, collections, and anything else that indicates mismanagement of credit obligations. If you can do this then you’ll bank about 40% of the possible credit score points and you’ll be well on your way.
Second, you have to manage your credit cards properly. This doesn’t mean you should avoid credit cards or even pay your balances in full each month, although that would save you money in interest fees. What this does mean is you have to maintain credit card balances that are no higher than 30% of your credit limits, and lower if possible. And if you can limit balances to fewer credit cards, that would help as well. Collectively these are worth approximately 35% of the points in your score.
Finally, apply for credit sparingly. This means avoiding loading up your credit reports with hard inquiries and newly opened retail store cards during the holiday season just to save a few dollars on your shopping. The result of doing so is avoiding the impact of hard inquiries and the reduced average age of your accounts caused by continuously adding newly opened accounts to your credit reports. This is worth another approximately 25% of credit score points.
That’s it. That’s 100% of the points that are up for grabs. If you can simply pay your bills on time, maintain low balances on your credit cards, and not apply for credit excessively you’ll easily eclipse 780. Then you’ll be the one writing the articles about how to earn and maintain great credit scores.