Almost 6 out of 10 Americans have a FICO credit score over 700. On the other hand, 11.1% of the population has a score under 500. This is a broad range of scores and people who have them. But what does this mean for us?
Our credit scores are important numbers for our financial lives. They impact many of our major life events. Let’s take a look at the perfect credit score and exactly how it can benefit you to have a good credit score.
How a Credit Score Is Calculated
In the US, there are three major credit bureaus: TransUnion, Equifax, and Experian. Each of these agencies collects information about your financial life including loans and credit cards you have and if you pay them off on time.
They can also gather information about your address and employment. Public records are collected too such as bankruptcy and repossessions.
Using all of this information, the bureaus create credit reports. You have a credit report available from each bureau. The information in each may be different depending on what information that bureau has.
Your credit score is created when this information is calculated into a three-digit number. There are multiple models for calculating the score, including FICO and VantageScore. You may end up having different credit scores with each bureau.
FICO weighs different aspects of your credit history differently according to what they think is important in determining credit-worthiness. The factors they weigh include:
- Payment history: 35%
- Amounts owed: 30%
- Length of credit history: 15%
- Credit mix: 10%
- New Credit 10%
VantageScore looks at similarly factors, but weighs them differently:
- Total credit usage, balance, and available credit: extremely influential
- Credit mix and experience: highly influential
- Payment history: moderately influential
- Age of credit history: less influential
- New accounts: less influential
What Is the Perfect Credit Score?
Your credit score will probably be different between each credit bureau and between FICO and VantageScore. The major credit score options all follow a similar range: 300-850. Higher credit scores are considered better.
850 is the highest possible score and therefore, the perfect credit score. According to Experian 1.2% of Americans actually have a perfect FICO score.
For practical purposes, anything above 810 is considered a perfect score. Having a score above 810 probably won’t gain any real benefits. Lenders consider these scores perfect for lending decisions. Only 1 in 6 Americans have a FICO score above 810.
The good news is you don’t actually need a “perfect” credit score in order to reap the benefits of a good score. A 760 will give you access to the best interest rates and anything above 700 is considered good.
How Does a Credit Score Impact Major Life Events?
Having a “good” credit score is very important and can impact major life events. A good score shows you are less risky for the lender and will most likely repay your debts. One of the biggest impacts of your credit score is your ability to be approved for credit.
Many lenders have minimum credit score requirements. If you don’t meet these, you may not be eligible for that credit card, mortgage, or car loan. Some landlords even check your credit score before agreeing to rent.
A good credit score can also save you money over time. You’ll be eligible for lower interest rates, which means you pay less money, keeping more in your pockets.
What Credit Score Do I Need for My Goals?
While a 700 will open most lending opportunities to you, certain financial goals may require certain credit scores. This will vary by lender and financial product, but there are some industry trends that can get you started.
To approve you for a conventional mortgage, most lenders require a credit score of at least 620. FHA loans only require a 600 or 680 depending on the specific loan. Since they are insured by the government, they are less risky for the lender, allowing a lower credit score.
If you are interested in a home equity loan, you should aim to have a score of at least 700. You could get approved with a 660, but may end up paying higher interest rates.
Many apartment rentals require at least a 620 or 650 before renting. If you are on the lower end, they may require additional security deposits or a co-signer.
Auto lenders may use an industry-specific FICO scoring model when approving loans. However, there isn’t a universal minimum score needed. You may still be able to get a smaller loan with a lower score. A higher score will open up larger limits and better interest rates.
If you’re buying a car, it’s possible to get approved with a lower score because used car loans and smaller limits are available. If you’re looking to lease a car, you’ll want at least a 680 to secure a decent loan.
It is also possible to get a credit card with a low credit score or no credit history. In fact, there are secured cards that work with this. But, if you want a high-end credit card with good rewards and a good interest rate, you need at least a 720, if not higher.
How to Improve Your Credit Score
If you want to raise your credit score, it’s important to start immediately. Increasing your credit score takes time and work. You can start by discussing credit repair and credit restoration options with a credit consultant. They can help make a plan of attack.
You should also check your credit report with the three credit bureaus. If there are any errors, be sure to dispute them so your report shows the most accurate information.
You can also take other steps such as removing negative debt. This will help you get on the right foot fast.
Having a perfect 850 credit score would be great, but it is not always necessary. You can still meet your financial goals with a more “normal” credit score. Higher scores can open more opportunities for you.
It’s important to start improving your credit now, so you’ll be ready for those life events when they happen. Contact a credit consultant today to discuss how you can create a credit repair plan.