If you’ve ever applied for a car loan, mortgage loan or even a credit card, you probably know how crucial your credit score is to qualifying and getting approved. The higher your credit score, the better your interest rate and terms will be, and the less you’ll pay over the life of the loan. It can also save you hundreds, if not thousands, of dollars throughout your lifetime.
But your credit score can impact a lot more than whether or not you qualify for a loan or a credit card. Credit scores are also used to determine whether or not you’ll be approved for an apartment, how much you’ll pay on your insurance premiums and even how much of a deposit you’ll have to pay to obtain a cell phone or have other utilities connected.
With the influence your credit score has on almost every aspect of your financial life, it’s not surprising that many consumers ask the question: “What is the highest credit score possible?”
There Is No “One” Universal Credit Score
This should be an easy enough question to answer, assuming we were talking about one universal credit score. However, despite the way credit scores are marketed to consumers as being “one” universal score, there are actually many different credit scores, built by many different companies and used by many different lenders. Not to mention the fact that you have three different credit reports at three different credit reporting agencies, and no two bureaus score your credit reports identically. Simply, they all vary. And in order to know the highest credit score possible, you’d need to know which credit score or credit score model you’re using.
There are many, many credit scores on the market today, but for the purpose of this example, we’re going to focus on the FICO credit score. Created by Fair Isaac, the FICO score is the most well-known — and the most widely used — credit score in the industry. If your FICO score is high, you can pretty much rest assured that your credit is in good shape — regardless of the scoring model used.
The FICO score ranges from 300 to 850, with a FICO score of 850 being the highest score you can obtain. Your FICO score is calculated from the information contained within your credit report and analyzes five key categories to determine your score:
• Your Payment History — 35% of your score
• How Much You Owe — 30% of your score
• Length of Credit History — 15% of your score
• New Credit, Inquiries — 10% of your score
• Types of Credit — 10% of your score
The concept of achieving a high FICO score isn’t as complicated as you might think. And based on these five categories and percentage weights, if you stick to three core fundamentals, your credit score will take care of itself. All you have to do is remember and practice these three basic principals:
1. Pay your bills on time, every time — no matter what.
2. Watch your debt balances. Don’t over extend yourself on credit cards, and keep your balances as low as possible.
3. Only apply for credit when you really need it.
The other two categories, length of credit history and types of credit will happen organically. As time passes, your credit history will mature and age. When you’re ready to purchase a home or a car, you’ll take care of the ‘credit mix’ category by adding a mortgage, or an auto installment loan to diversify your credit mix. By simply following these three basic principals, your FICO score will shine.
Achieving a Perfect 850
“That’s great,” you say, “but I want to achieve that perfect 850. I want the satisfaction of knowing that I’m one of the credit elite.” That’s a fantastic goal, but the one thing consumers need to keep in mind when working towards that perfection — especially with credit scores — is that it’s a lot easier to wreck a perfectly great credit score by trying to attain that perfect 850.
Credit score models are complicated mathematical algorithms. They are developed by statisticians and have hundreds, if not thousands, of possible characteristics built into each model. Each model varies, and we won’t even get into the different scorecards that may be involved within each model. The point is: aiming for perfection without understanding the complexities of the scoring model can oftentimes cause you to do more damage than good. There are many horror stories we’ve heard where someone has tried various unproven strategies to build their scores from the high 700s to the 800s, only to find their strategy backfires and hurts their scores in the process.
Aim for a high score. But if your score is already in the high 700s or low 800s, focusing on reaching that 850 may cause you to damage the excellent scores you already have. Remember, the goal isn’t perfection. The goal is to get the best deals and best interest rates available when you finance a loan or apply for credit.
Lenders Want High Scores, Not Perfect Scores
Lenders are really looking for a “good credit risk.” That is, someone who will pay back the loan and pay it back on time. In fact, perfection is subjective and depends on the lender. When it comes to qualifying for a loan, or any other credit product, the goal is to get the best interest rates and terms offered by your lender. Typically a FICO score of 760 or higher is golden, giving you access to the best interest rates and terms a lender has to offer. This means that even if you have a score of 800, you’re still qualifying for the same deal as someone with a 760, or an 850 for that matter.
Characteristics of FICO High Achievers
According to a recent infographic published by myFICO, the consumer division of Fair Isaac, a FICO score of 785 or higher puts you in FICO’s top 25 percent of “High Achievers.” While not perfect 850s, FICO High Achievers are the credit elite. If you’re set on achieving the highest credit score, or as close to perfection as possible, here are a few key high achiever characteristics to help guide you on your journey.
FICO High Achievers:
• Consistently make on-time payments on all of their credit obligations, with 96% showing no missed payments whatsoever on their credit reports.
• Avoid maxing out their credit cards and keep low balances, using an average of 7% of their available credit limits.
• Carry an average of seven credit cards, which include both open and closed accounts.
• Have an average of four open credit accounts with balances, including both credit cards and traditional loan accounts.
• Rarely open new accounts, with their oldest credit account being opened an average of 25 years ago. The most recent account opening averages 28 months old, and an average credit account of 11 years old.
Don’t know your FICO score? Sign up for Credit.com’s free Credit Report Card and you’ll get a free credit score along with a VantageScore credit score.
Image: Marcin Wichary, via Flickr