Understanding and Achieving the Best Credit Score

When it comes to securing the best terms on credit, having a perfect credit score of 850 on the FICO® Score scale of 300 to 850 isn’t necessary. In fact, you may not even need a score of 800 or better to reap the benefits of a high credit score. Your best credit score is one that qualifies you for the credit you seek with favorable terms and a low interest rate, considering your current credit usage, history, and habits.

What’s the Best Credit Score?

The simplistic definition of a perfect credit score is 850. Both the FICO® Score and its chief competitor, VantageScore®, assign scores on scales of 300 to 850. The FICO® Score further groups scores into bands according to general creditworthiness:

• 800–850: Exceptional
• 740–799: Very good
• 670–739: Good
• 580–669: Fair
• 300–579: Poor

While an admirable goal, a FICO® Score of 850 isn’t essential to gain the top benefits credit scores can provide. Most lenders offer their best interest rates, fees, and perks to borrowers with scores of 800 or greater. Some lenders may extend their best lending terms to borrowers with scores in the high 700s.

Why a Good Credit Score Is Important

While you may be able to borrow money with a credit score that’s considered fair or even poor, there are many advantages to building up a credit score that rates as good (670 to 739) or better on the FICO® Score range. A good credit score can give you a wider range of credit offers to choose from and bring other benefits, such as:

• Lower interest rates on credit cards and loans
• Better borrowing terms
• Lower insurance rates
• Access to better credit card rewards programs
• Greater options for renting houses or apartments
• Lower security deposits on housing and leased equipment

What Credit Scores Do You Need for Different Kinds of Credit?

Here’s an overview of the minimum credit scores you’ll need for various forms of consumer credit. Keep in mind that lenders set their own standards, so some may accept scores a little below the ones cited here, while others might require scores higher than these minimums. The higher your credit score is when you apply, the better rates and terms you’ll receive.

Mortgages

There’s no industry-standard credit score requirement for mortgages, but a good ballpark number for conventional mortgages is a minimum FICO® Score of 620. If you meet other qualifications for a mortgage backed by the Federal Housing Administration (an FHA loan), you may be approved with a FICO® Score as low as 500 if you make a down payment of at least 10% of the home’s purchase price. A FICO® Score of 580 or better can earn you approval for a down payment of just 3.5% of the purchase price.

Auto Loans

Auto loans are available to borrowers with FICO® Scores categorized from poor (579 or lower) to exceptional (800 or greater). Some auto lenders actively pursue borrowers with scores in the fair-to-poor range, understanding that they can charge them higher interest rates and fees as a trade-off for taking on additional risk. Auto loan borrowers with poor or fair scores will likely be charged significantly higher interest rates than borrowers with better scores and may be subject to higher down payment requirements and lower loan amounts.

Personal Loans

There is no universal FICO® Score requirement for unsecured personal loans, but a score classified as good (670 to 739) or better will likely position you to qualify at a favorable interest rate. Because personal loans are typically not backed by collateral, they may have stricter credit score requirements and higher interest rates than you’d expect on a secured loan for a comparable sum.

Credit Cards

You may be able to qualify for a credit card with a FICO® Score as low as 600, which falls squarely in fair territory, but you’ll have far more options with a score in the good range. Cards with rewards and perks are available to borrowers with good credit, but the most generous ones are reserved for borrowers with very good to exceptional scores. If you can’t qualify for a conventional credit card, consider trying a secured credit card, which requires you to put down a deposit. As long as you use the card and pay your bills on time each month, you’ll establish a positive payment history that can help build your credit scores.

How to Maintain Good Credit

The key to maintaining good credit scores is understanding the factors that influence credit scores and adopting sound habits that meet the requirements of each factor:

Pay Your Bills on Time

The single greatest influence on credit scores is payment history, and there’s no single behavior that promotes credit score improvement more than paying your bills on time every month. Just one late or missed payment can pull your scores down significantly. Payment history accounts for 35% of your FICO® Score.

Keep Credit Balances Low

Credit usage, particularly as represented by your credit utilization ratio—the percentage of your credit limit you’re using on credit cards—accounts for about 30% of your FICO® Score. Utilization that exceeds about 30% can have a bigger negative impact on your scores, while consumers with exceptional scores tend to keep utilization below 10%.

Cultivate a Variety of Credit Accounts

People with outstanding credit scores typically have a diverse portfolio of credit accounts, including some combination of car loans, credit cards, student loans, mortgages, and other credit products. Credit scoring models view a mix of accounts as a sign of good credit management. Credit mix accounts for about 10% of your FICO® Score.

Take on New Credit Only as Needed

Recently opened credit accounts and credit checks known as hard inquiries that lenders perform when you apply for credit account for 10% of your FICO® Score. Lenders and scoring models see an abundance of new accounts or inquiries as a potential sign of overreliance on credit, which can hurt credit scores.

Be Patient

Your experience as a credit user, as measured by the ages of your accounts, makes up roughly 15% of your FICO® Score. Forming the habits described above and maintaining them over the long haul will benefit your credit scores. All other factors being equal, the longer your credit history, the higher your credit scores.

The Bottom Line

If your credit score allows you access to the type of loan or credit you seek, at an interest rate and borrowing terms you can afford, your score is high enough to meet your needs today. By managing your credit with diligence and patience, you can improve your scores over time, earning access to even better lending terms and options. Checking your FICO® Score for free from Experian can help you track your score improvement and the opportunities that come with it.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. Our team of experts is ready to assist you in achieving your financial goals with the best possible terms.