Many loans and credit cards with more favorable terms require you to have an excellent credit score to qualify. If your credit score is in good shape but not perfect, you may be wondering what the highest score is and whether you can reach it.
The good news is, you can still get approved for plenty of great deals if you have very good or excellent credit, or a FICO credit score above 740. Read on to learn how your credit score is calculated, what the highest credit score is, and how to improve your score.
How do credit scores work?
Credit score ranges
Your FICO credit score is a three-digit number that shows your creditworthiness, or how likely you'll pay back a loan based on your credit report. FICO scores range from 300 to 850, or poor to excellent. Here's a breakdown of the FICO credit score ranges:
- Poor credit: 300 - 579
- Fair credit: 580 - 669
- Good credit: 670 - 739
- Very good credit: 740 - 799
- Excellent credit: 800 - 850
A perfect FICO credit score is an 850.
How your credit score is calculated
FICO calculates your credit score by weighing your payment history, amounts owed, the length of your credit history, new credit, and your credit mix. Here's how each of these factors can determine your score:
- Payment history: Your history of payments is the most important factor of your FICO credit score and is worth 35% of your score. This includes any on-time, late, or missed payments on your credit accounts.
- Amounts owed: Amounts owed refers to how much you owe on your credit accounts, including loans and credit cards, and your credit utilization ratio, or the amount of available credit you're using. This factor makes up 30% of your credit score.
- Length of credit history: The length of your credit history, or the age of your credit accounts, makes up 15% of your FICO score. Although a longer credit history can mean a better credit score, you can still have a good score with a short credit history if your other factors (like payment history and amounts owed) are in good shape.
- Credit mix: Your credit mix makes up 10% of your FICO score and refers to the different types of accounts you have, like credit cards, mortgages, and personal loans. Having a diverse credit mix can positively impact your score.
- New credit: Your new credit, which includes recently opened accounts and new credit inquiries, affects 10% of your credit score. Opening multiple new accounts in a short time period can bring down your score.
Why your credit score matters
Your credit score can be a determining factor of whether or not you get approved for a loan or credit card, as well as what interest rate you may be approved for. Lenders, credit card issuers, and other financial institutions use your credit score to help understand the level of risk you'll pose to them, and whether you'll pay back your debt on time. The higher your credit score, the less risky you'll seem to lenders.
Can I get a perfect credit score?
Although it's possible to reach a perfect FICO credit score of 850, it can be very difficult to do so. According to FICO's most recent statistics, only 1.6% of Americans have a perfect credit score.
Luckily, you don't need a perfect credit score to get the best deals. If you have an excellent credit score, or a score above 800, you can qualify for optimal loan terms, mortgages, and credit cards.
How to improve your credit score
If you're aiming for an excellent credit score, here are some tips that can help you gradually improve your score:
Make on-time payments
Since payment history is the biggest factor affecting your FICO credit score, making on-time payments consistently will have a great impact on your score in the long run. If you have a hard time keeping track of when all your bills are due, setting up automatic payments can help you make timely payments without having to think about it. Try to avoid missed or late payments as much as possible, since these can bring your score down significantly.
Maintain a low credit utilization ratio
Your credit utilization ratio also has a big impact on your FICO credit score. You can calculate yours by dividing the total of your credit card balances by the total of your credit card limits. Having a credit utilization ratio of 30% or higher can have a negative impact on your FICO credit score, so try to keep your balances lower than this percentage each month. This can help increase your score over time.
Keep your old accounts open
Having a longer credit history makes you appear more favorably to lenders, so keep your old credit accounts open. Closing old accounts will lower your credit history and increase your credit utilization ratio, both of which can lower your FICO score.
Dispute any errors on your credit report
Credit report errors can negatively affect your score, but luckily these can be an easy fix. Check your credit report to make sure there are no inaccuracies. If you see any errors on your report, you can file a dispute with the credit reporting agencies to get them removed.
Limit hard inquiries
When you apply for new loans or credit cards, many lenders and issuers will conduct a hard inquiry on your credit report. Having too many hard inquiries in a short amount of time can bring down your credit score temporarily, so try to limit the amount of new credit accounts you apply for.
The bottom line
Reaching a perfect FICO score of 850 is tough to do, but fortunately, you don't need a perfect score to qualify for more favorable loans and credit cards. Having a very good or excellent credit score can get you some great deals and show lenders that you're a reliable borrower.
If your credit score needs improving, don't worry. Making consistent on-time payments, maintaining a low credit utilization ratio, and trying the other methods mentioned above will boost your score over time, and you may eventually get approved for the loans and credit cards you want.
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Original Source: What's the Highest Credit Score Possible, and How Can You Reach It?
