What is an excellent credit score? – A credit score is a three-digit number that can be used to determine some of the most critical aspects of your life, such as whether you are approved for a mortgage, financed for a car, or even hired for your dream job.
Lenders and decision-makers (landlords, certain employers, utility companies, and so on) use your credit score to determine your creditworthiness. However, when the score is low, it can feel as if it determines a person’s actual worthiness.
Some landlords refuse to rent to people with bad credit. A low credit score can raise your interest rates on everything from credit cards to auto loans to mortgages — assuming you can get approved for one. A low credit score may result in an increase in your car insurance premium in many states. While many organizations actively oppose how credit scores are used against consumers, the change is slow.
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What is considered excellent credit?
Credit scores range between 300 and 850. And the higher the number, the better it gets. This is because lenders believe that the higher the score, the lower the risk.
FICO Score and VantageScore are the two most common credit scoring systems.
FICO considers any credit score above 800 to be excellent — or “exceptional” in their terminology.
VantageScore defines excellent credit as 781 or higher, but scores above 750 will qualify a consumer for the best terms on most products.
Although most lenders use these scores to help them make lending decisions, they are not the be-all and end-all of whether a person is approved for credit. Every lender has their own set of rules and assumptions about who their ideal client or consumer is. When deciding whether to extend credit, some lenders do not use credit scores at all. And, depending on the product being purchased, some industries or lenders have their own scoring model.
Here is the ranking system for FICO:
- Poor – Under 580
- Fair – 580 to 669
- Good – 670 to 739
- Very good – 740 to 799
- Exceptional – 800+
And here is the ranking system for VantageScore:
- Very poor – 300 to 499
- Poor – 500 to 600
- Fair – 601 to 660
- Good – 661 to 780
- Excellent – 781 to 850
Do you really need an excellent credit score?
The quick answer? No. According to the company’s report, only 23% of Americans have a FICO Score of 800 or higher.
That is, 77% of Americans do not have perfect credit but are still able to buy cars, buy cell phones on credit, and get approved for rental apartments and home mortgages.
Furthermore, lenders such as Upstart and OppLoans place less emphasis on the credit score in favor of more inclusive factors such as length of employment and reliability with rent payments.
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There are also subprime lenders who serve people with bad credit. However, they frequently and often correctly get a bad rap for charging predatory interest rates. Subprime lenders, on the other hand, allow the most financially vulnerable people to purchase necessary big-ticket items like automobiles. And a person with a subprime loan who makes on-time payments will be able to build credit and improve their credit score. They are not prohibited from taking part in the “credit game.”
The benefit of having a good credit score is the bargaining power you have when it comes time to negotiate deals. If you have a high credit score, use it in any financial situation where your credit report will be pulled.
You are more likely to qualify for perks such as credit cards with airport lounge access or to purchase items with no money down if you have an excellent credit score.
All of this is to say that the difference between good and excellent credit isn’t life-changing, but there are some compelling reasons to strive for excellent or exceptional credit if possible.
What factors make up an excellent credit score?
FICO and VantageScore calculate the “excellent credit score” in slightly different ways.
Here’s Tom Quinn, the vice president of FICO, explanation of how FICO Scores are calculated, broken down into five categories:
- Payment history (35%) – How you’ve paid your bills in the past, whether on time or late or missed payments. The greater the impact, the more severe, recent, and frequent the late payment information.
- Amounts owed (30%) – The total amount owed, the number of accounts with balances, and how much of your available credit is being used. Furthermore, when calculating your utilization, your FICO Score may take into account closed accounts with balances.
- Credit history length (15%) – How long your credit accounts have been open, including the oldest account, the newest account, and the average age of all your accounts.
- Credit mix (10%) – Credit cards, retail accounts, installment loans, and mortgage loans are all examples of credit accounts that are used or reported. If your credit report lacks a lot of other information on which to base a score, your credit mix will become more important.
- New credit (10%) – How many new accounts you’ve opened recently, as well as whether you’ve been rate shopping for a single loan or applying for several new credit lines. Opening multiple new credit accounts in a short period of time indicates a higher level of credit risk.
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When describing how its scores are calculated, VantageScore says it prefers not to use pie charts for specific breakdowns. The company instead prefers to use a scale ranging from “extremely influential” to “less influential.”
“How information in your score is weighted depends on what information is in your score,” Richardson says. “If you only have one credit card, missing a payment or having a high utilization on that card will weigh more than someone who has 11 different accounts.”
Following is a breakdown of how VantageScore calculates scores:
- Most influential: Total credit usage, balance, and available credit. For example, if your credit card has a $10,000 limit, try not to carry a load of more than $3,000, or 30%. Being “credit stressed” is bad.
- Highly influential: Credit mix and experience. The ability to demonstrate that you can manage a variety of credit (a credit card, mortgage, and/or car loan) demonstrates responsibility regardless of the type of credit issued. You understand how to manage payments on an installment loan or revolving credit.
- Moderately influential: Payment history. Lenders generally believe that your past behavior predicts your future behavior. Paying your bills on time is the most effective way to improve your credit score. Missed payments lower your credit score, and the longer it takes to “make good” on a missed payment, the lower your score becomes.
- Less influential: Age of credit history. People trust people they have known for a longer period of time, just like in real life. The more time you’ve had a credit card, the better.
- Less influential: New accounts opened. Many lenders are wary of people who open an excessive number of accounts in a short period of time. They believe they are in financial trouble. Spread out your credit/loan applications.
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Other differences between FICO and VantageScore
While the information required for both a VantageScore and a FICO Score is very similar, the main difference, according to Palfrey at Crediful, is in how the data is used. The distinctions are as follows:
- Credit history. A credit history from an account that has been open for at least six months is required to generate a FICO Score. The VantageScore method accepts accounts that have only been active for one month, making it more suitable for those who are new to credit.
- Credit inquiries. A credit inquiry occurs when a request for information on your file is made. A hard request is made by a lender after you have applied for credit, whereas a soft request is made by either a consumer requesting information from their own file or a lender pre-screening you. Multiple requests of the same type within a 45-day period will be treated as one hard inquiry by the FICO method. This limit is reduced to 14 days by VantageScore, and the inquiries can be for different types of credit.
- Trending data. Your FICO Score rating is determined by the score at the time your score is generated. Your VantageScore, on the other hand, accumulates over time. It can contain up to two years’ worth of spending and credit history.
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How to get an excellent credit score?
So finally, How to get an excellent credit score? If you’re currently in a lower tier and want to move up, the most effective way is to “aim to never miss any payment dates and pay off any outstanding credit as quickly as possible,” according to Palfrey. “Make an effort to limit the number of new credit applications submitted.”
Other ways to improve your credit score include:
- Check that your credit card balance is less than 30% of your credit card limit. If you find yourself using more than a third of your credit limit, pay your credit card bill twice or more per month.
- Even if you’ve paid off your credit card balance, don’t close the account. Having a long history on your credit report looks good.
- Request a higher credit limit on your credit card (but do not use it!) to improve your credit utilization ratio.
- Examine your credit report for any errors. If you discover any incorrect information in your report, have it removed.
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While you don’t need a perfect credit score to get a loan or credit card, or to buy a house or a car, the higher your score, the more perks you’ll get and the lower your fees and interest.
Having said that, an increasing number of lenders are abandoning traditional credit scores in favor of more inclusive, alternative credit reporting methods. They’ll take into account things like your employment and rental history, not just the three-digit number on your file.
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