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- You might think people who are good with money aim for a perfect credit score of 850.
- However, I’m convinced you don’t need your credit score to be perfect.
- Your credit score is a tool for your life and finances, and a perfect credit score means you probably aren’t using it to your advantage.
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Credit scores are calculated using different models from different credit-reporting agencies. While the exact algorithms are proprietary, we know that a perfect score is usually 850 points and that the biggest factors affecting your credit score are your payment history and your “credit utilization,” how much of your available credit you’re using at any given time. These two factors together account for about 70% of your credit score.
The remaining third is a combination of the age of your credit history and your “credit mix.” Potential lenders like to see that you’ve had accounts open for several years and used them responsibly, and that you can successfully manage different types of credit – for example, a combination of credit cards, student loans, and a home loan.
As I’m someone who spends a lot of time thinking and writing about money and who has almost 30 credit cards, you’d think a perfect credit score would be my dream. But it’s not, and here’s why.
Striving for a perfect score can incentivize bad financial decisions
If you’re aiming for a perfect credit score, you might look at the list of factors that affect your score and think “Oh, I could do some things to change this!” For example, some people try to improve their credit score by taking out a secured loan. Experian, one of the major credit-reporting agencies, even suggests this as a way to improve your score by demonstrating your ability to make payments.
But loans aren’t free – and unless you’re buying a car, a home, or another major asset, you’re going to have to put down your own cash to borrow against. That means you aren’t gaining any financial flexibility, just paying for the privilege of borrowing your own money. Unless your credit history is nonexistent, it’s probably not worth the cost for a minor bump in your credit score.
Artificially making your credit history longer puts your score at the mercy of someone else
Another common credit-improvement technique is adding yourself as an “authorized user” or responsible party on someone else’s older credit line, since that will increase the average age of the credit lines on your report.
But this can be a double-edged sword. If that person misses a payment or uses too high a percentage of their credit in a given month, that will also be reflected on your credit history and could actually make your score take a nosedive.
You can get a lot more value from signing up for new credit cards than from having a perfect credit score
One of the biggest pieces of advice that you’ll hear from people talking about how to maintain a good credit score is that you shouldn’t apply for new credit since that will hurt your score.
It’s true that a large number of recent credit inquiries or new accounts can make lenders concerned that you’re struggling to pay your bills, but as long as you’re paying your bills every month, these new accounts will have a minimal and short-lived effect on your credit score.
In fact, over time, having more accounts is likely to increase your score, since you’ll be using a smaller percentage of the overall credit available to you. That’s why it’s possible to have 26 or more credit cards and still maintain a credit score in the 800s.
And in the meantime, you can reap the rewards of credit-card welcome offers, which are generally worth far more than a perfect credit score, as long as you’re paying off your bills every month.
One important exception to this: If you’re planning to apply for a mortgage or other large loan soon, you may want to hold off on the credit-card applications for a bit. While it’s far from impossible to get a good rate on a mortgage even with a lot of recent activity on your credit report, it can be a red flag for lenders and lead to a lot of additional paperwork and questions.
This is the main reason I never want to have a perfect credit score: The travel rewards I can earn are way more valuable to me than a perfect score. And while I wouldn’t necessarily want to apply for a mortgage right now, if I stopped getting new cards for about a year, my score should jump enough to qualify me for the lowest mortgage interest rates.
In practice, there’s not really a difference between a great score and a perfect one
Lenders don’t expect anyone to have a perfect credit score – anything above 740 is considered “very good,” according to the Fair Isaac Corporation, the creator of the FICO credit score, and anything above 800 is considered “excellent.”
A score in this range tells lenders you have a less than 2% chance of failing to make payments on time. Even a “good” score, between 640 and 739, is a very strong sign to lenders, since only about 8% of people in this score range become late on their payments.
Lenders often don’t care about the difference between a very good score and a perfect one, so there’s no reason to stress out about it. Just make sure you’re doing everything necessary to keep your financial house in order, and spend your time focusing on other things – like how to spend the points you earn from a new credit-card bonus!
- Read more about credit scores:
- Making a quick phone call after checking my credit fixed a $12,000 error and increased my credit score by 100 points
- How to get your credit report for free
- Your credit score may drop after you finally pay off debt, but it’s only temporary
- How to request an increase on your credit limit to improve your credit score