What is an excellent credit score?
An excellent credit score is a FICO® score of 800 to 850 or a VantageScore of 781 to 850.
To clarify what these different scores mean, FICO is the most widely used credit scoring system by lenders. VantageScore isn’t as popular, but it’s often the score provided by free credit score tools.
Having a credit score in this range is great for your personal finances. With great credit, you will likely qualify for the best credit cards and the lowest interest rate on loans. Whether you have great credit and want to take advantage of it or are trying to make it happen, here’s everything you need to know.
What is an excellent credit score?
An excellent credit score is one that is in the highest credit score range. Under the FICO scoring model, it is technically called exceptional credit, and it is 800 to 850. Under the VantageScore model, excellent credit is between 781 and 850. Excellent credit is not uncommon. According to Experian, 21% of Americans have an excellent FICO® score and 23% an excellent VantageScore.
How credit scores are calculated
Each credit bureau uses several factors to calculate your credit score, and understanding them can help you maintain or improve your credit. These factors are:
- Payment history: The most important part of your credit score is your payment history. On-time payments that are reported to the three major credit bureaus improve your credit score. Any late payment of 30 days or more seriously damages your credit.
- Credit utilization rate: The percentage of your credit limits that you use is your credit utilization ratio. A credit usage of less than 30% is the standard recommendation. So if you have a credit card with a credit limit of $ 1,000, it is best to keep the balance below $ 300.
- Duration of credit history: The average age of your credit accounts, the age of your oldest credit account, and the age of your youngest credit account all play a role here. Older accounts are better for your credit, so this is a rating criterion that takes time to improve.
- New credit: This category includes the number of rigorous credit checks on your credit report in the past 12 months. A rigorous credit check takes place when a lender examines your credit report. The time since opening a new credit account is also part of your new credit.
- Combination of credits: The types of credit you use make up your credit mix. A healthy credit mix occurs when you have both revolving accounts, such as credit cards, and installment loans on just one of the two. But since this is a smaller part of your credit score, it’s usually not a good idea to get a loan that will cost you interest just to improve your credit. You can still have a great credit score even if you only carry credit cards.
Of these five categories, payment history and use of credit carry the most weight. The length of credit history, new loans, and loan mix all play less of a role. They are still important, but not as important as the first two.
Benefits of a great credit score
Great credit makes life easier and cheaper. Here are the main benefits of having a great credit score:
- You can benefit from the best credit cards. These cards tend to have more benefits than credit cards for consumers with lower credit scores. Your credit score doesn’t guarantee approval, but it’s one of the most important factors credit card companies look at during the application process.
- You can get lower interest rates and possibly get approved for larger loans. This includes all types of loans, including personal loans, auto loans, and mortgages.
- Credit card companies may approve you higher credit limits.
- You have a better chance of passing a credit check with a rental company, which helps you when looking for a house or apartment to rent.
- In most states, auto insurance companies can use your credit to determine your premiums. Great credit can lower your auto insurance rates.
- Utility companies are less likely to require a security deposit to set up service with them.
Your credit score will almost certainly play a major role in your life. This is why a high credit score is a wise financial goal.
Do you need great credit?
No, you don’t need great credit. It doesn’t hurt, but a good credit score can be more than enough.
A FICO® score of at least 720, which is within the correct FICO credit score range, will give you many of the same benefits as excellent credit. You shouldn’t have any trouble passing a credit check or getting low interest rates on a loan. Your credit score will also be high enough to qualify for any credit card in the market. Keep in mind that a high credit score never guarantees approval.
The only area where a higher credit score can help is a mortgage. Getting the lowest mortgage interest rates usually requires a FICO® score of 760 or higher. However, it is still below the threshold for excellent credit.
How to increase your credit score
If you want to increase your credit score, follow these tips:
- Always pay your bills on time. A solid payment history is essential. Make sure you have at least one credit card that you use regularly and pay it off by the due date. Not all types of bills get reported to the credit bureaus and count towards your payment history, but credit card bills do.
- Keep your credit utilization rate low. A credit usage of less than 30% is the most common recommendation. To find out how much this is, add the credit limits of all of your credit cards together. Multiply this number by 0.3. Try to keep your credit card balance below this amount at all times. Also remember that the lower your credit usage, the better.
- Build up the length of your credit history. Avoid closing the credit cards you have the longest. If a card has an annual fee that you don’t want to pay, see if you can downgrade the credit card instead of canceling it. It’s fine to open new credit cards, but be selective as each one will reduce the average age of your credit account.
- Don’t apply for new credit too often. Every time you apply for new credit, it results in a serious investigation of your credit report. Too many difficult requests can prevent your score from increasing. A good guideline is not to apply for new credit more often than every six to 12 months.
These rules work regardless of your current credit score. The same advice applies to building credit whether your score is currently in the bad or good credit range.
However, it takes more work if your goal is great credit. You can stick to the same general rules, but it may be necessary to aim even higher with them. For example, instead of just keeping your credit utilization rate below 30%, you might need to bring it down below 20%. You may also need to add a year or more to your credit history and keep a payment history on time.
While great credit is nice to have, you probably don’t need it. There are no new benefits to having a FICO® score of 800 instead of 760. But the steps you need to take to achieve a great credit score are smart financial habits. Whether you get great credit or not, they will give you a credit score high enough for everything you need.