OWhen a lender wants to know how likely you are to repay your loan or credit card balance, they are looking at one of your credit scores. This three-digit number indicates whether you are a great credit risk, a bad risk, or somewhere in between.
If you have excellent credit, credit card issuers and lenders are more likely to approve your applications. A great credit score can also help you qualify for the best credit cards, lowest interest rates, and best terms a lender has to offer.
What is an excellent credit score?
The definition of a great credit rating may be different depending on who you ask. Each credit card company and lender sets its own credit score criteria. So, the credit score thresholds you need to meet for approval, lower interest rates, and better borrowing terms can vary from one credit provider to another.
According to Experian, a lender might consider your credit score excellent or outstanding with numbers like:
- FICO score: 800-850
- VantageScore credit score: 781-850
What are the credit score ranges?
Your credit rating can range from very low/poor to exceptional/excellent. It all depends on (a) the information in your credit reports and (b) the credit scoring model a lender uses to assess those details.
Here are the basic credit scoring ranges for FICO scores and VantageScore credit scores.
- Exceptional: 800-850
- Very good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: 300-579
- VantageScore credit score:
- Excellent: 781-850
- Good: 661-780
- Fair: 601-660
- Poor: 500-600
- Very low: 300-499
Throughout life, it’s common for your credit scores to increase, making it easier to get credit. But they can also drop, making it harder and more expensive to access finance and services.
Why is a great credit score important?
Your credit scores can have a direct impact on your ability to get a mortgage, take out a car loan and open a credit card account. Credit also plays a role in how much money you can borrow and how much it will cost you to do so.
Having a great credit score is important every time you fill out a new credit application. Yet other entities besides new lenders and credit card issuers can also access your credit scores to make decisions.
Who cares about your credit score?
Here is a list of people who are legally authorized to access your credit reports and scores:
- Current credit card issuers, lenders and creditors can check your credit ratings in several circumstances. For example, if you request a higher credit limit, your card issuer may review your credit. Most credit card companies also check one of your credit scores each month, to make sure they want to continue doing business with you under current borrowing terms.
- Potential credit card issuers, lenders and creditors will review your credit scores to determine whether to approve or deny your credit applications. Credit scores also guide credit card issuers when sending pre-approved credit offers.
- utility companies may use your credit scores to determine if you need to pay a security deposit before establishing service.
- Owners may use a credit check, including your payment history, to decide whether or not to rent to you (and the size of your initial deposits).
- Insurance companies often rely on credit-based insurance scores to determine how much your insurance premiums are and whether to offer you a policy. These scores are different from traditional FICO scores and VantageScore credit scores, but your credit history still plays an important role here.
- Employers may review your credit reports (never your credit scores) to make hiring decisions. However, they first need your written permission to access your credit information.
- Collection Agencies access credit reports to locate individuals and attempt to collect outstanding debts. This process is called hop tracking.
- You can access your credit reports for free to ensure that the information in your credit files is accurate. You can receive a free report every 12 months from each of the three major credit bureaus (Experian, Equifax and TransUnion). AnnualCreditReport.com is the only official free credit report site. You can also access your credit scores, but you may have to pay a fee to do so.
If you discover errors in your credit reports, you have the right to dispute them with the appropriate credit reporting agency. Credit errors can lower your credit scores. Thus, you should make sure to correct any inaccuracies you find on your credit reports.
How to get a great credit score
The length of your credit history makes up 15% of your FICO score. As you age and maintain a positive payment history, your scores should increase.
However, young people can also obtain an excellent credit score.
A FICO analysis found that younger consumers with a FICO score of 800 or higher had several credit report factors in common.
Median credit profile of consumers with FICO scores of 800-850 (youngest 15%)
- 47 months (3 years and 9 months) since the last late payment.
- 96% had never missed a payment.
- 9 renewable accounts.
- 5% renewable use.
- 12% highest renewable utilization rate.
- Total balance of $1,598 on revolving accounts.
- 12 months since the last new account opened.
- 9 months since the last firm credit inquiry.
- Average credit history of 99 months (8 years and 3 months).
As you can see, young consumers with excellent credit scores achieved them by maintaining an on-time payment history and maintaining the relationship between their credit card balances and limits (i.e. say the rate of renewable use) low.
These young members of the 800 credit points club were not afraid to open credit cards (with nine revolving accounts on average). However, they took care to handle credit cards wisely.
Your credit report doesn’t have to look exactly like the one described above to get a great credit score. Still, studying the habits of people with 800+ credit scores can point you in the right direction on your own credit-building journey.
Why do credit scores change?
Your credit scores are not constant. They behave more like the numbers on your scale than say a more permanent number, like your height. As the information on your credit reports changes, your credit scores tend to follow suit.
Here’s why your credit scores may differ from month to month:
- The amount of debt you owe has increased or decreased.
- Your credit utilization rate has changed.
- Your account balances have changed.
- Your payment history has changed due to new late payments appearing on your credit reports or old late payments aging.
- You have requested or opened new lines of credit.
- You closed a credit card.
- Disparaging information has appeared on your credit reports or has been deleted.
- You are a victim of identity theft.
A small fluctuation is normal when it comes to your credit scores. But big changes could signal a bigger problem.
Some credit card companies make credit monitoring easier by giving you free access to one of your credit scores each month. Just remember, it’s also important to keep an eye on your three credit reports themselves, not just your credit scores.
Monitoring your credit reports will not prevent credit problems from occurring. But this good habit can allow you to react quickly in the event of identity theft or other types of credit errors.
How to get a perfect credit score
Most credit scores range from 300 to 850. So if your goal is to achieve credit score perfection, then 850 is where you’ll want to aim.
In the United States, about 1.2% of all FICO scores are perfect at 850.
Experian analyzed the characteristics of 850 credit point holders and found that members of this elite group shared several attributes. Consumers with 850 credit scores:
- Had more open accounts but carried less debt.
- Paid their bills on time each month.
- Maintaining low levels of credit utilization (with plenty of credit available).
This may encourage you to learn that income is not a factor in your credit scores. In fact, about 20% of people with a credit score of 850 earned $50,000 or less per year.
However, you don’t need a perfect credit score to access the best deals from credit card issuers and lenders. An excellent credit rating is high enough to achieve this goal. Going beyond a great credit score to get the highest credit score doesn’t have much tangible value, other than some cool bragging rights.
Best Ways to Improve Your Credit Score
Obtaining an excellent credit score can have a significant impact on your financial life. Great credit can make it easier to qualify for the financing you need and help you pay less to borrow money.
Whether your goal is to establish credit, rebuild your credit, or improve your good credit scores, most of the advice will be the same. Above all, you want to pay your credit obligations on time. Payment history, after all, influences your credit scores more than any other factor.
Moreover, the use of credit also has a significant effect on your credit scores. (Credit usage is a major factor in 30% of your FICO scores.) Therefore, you should always try to find out how much of your credit card limits you are using. Lower utilization rates are better, with 0-1% being the best credit utilization rate for your credit scores.
A good combination of credits can also help you. For example, you might want to aim for a combination of revolving accounts and installment loans in your credit reports.
And if you’re looking for out-of-the-box credit enhancement strategies, becoming an authorized user or signing up for Experian Boost could also benefit you.
The good credit habits above can improve your credit rating over time. Maintaining great credit takes a lifetime of effort, but it can also unlock a lifetime of benefits in the process.
This article was written by Michelle Black and originally appeared on Credit Card Insider.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.