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Having an exceptional credit score allows you to get low interest rates on mortgages and auto loans as well as lower financing rates on car leases and credit cards.
So what is the best credit score?
While there are several companies that provide credit scores, Fair Isaac Corp., or FICO, provides credit scores to 90 percent of lenders.
FICO credit scores range between 300 and 850. The best credit score is 850. Here’s a breakdown of FICO scores and what they mean:
300 to 579 — Very poor credit.
580 to 669 — Fair credit.
670 to 739 — Good credit.
740 to 799 — Very good credit.
800 to 850 — Exceptional credit.
How to achieve the best credit score
Is achieving the elusive 850 credit score even possible? FICO provides some basics to help consumers understand the factors that affect scores.
FICO calculates your score based on five factors: payment history, amount owed, length of credit history, new credit and credit mix.
Your payment history makes the biggest impact on your credit score. It accounts for 35 percent of your score. Your payment history includes all credit payments and certain public records, such as liens and bankruptcies.
Your payment history stays on your credit report for seven years. Bankruptcies stay on your credit report for seven to 10 years, depending on the type of bankruptcy.
Assuming you haven’t declared bankruptcy in the past 10 years, and you’ve consistently paid your bills on time for the past seven years, you’ve probably optimized this part of your report.
Amount of debt owed
Your credit utilization ratio compares the amount of debt you have to the amount of credit you have available. Your ratio accounts for 30 percent of your FICO score.
To determine your score, divide the amount of your debt into the amount of your available credit. For example, if you have $4,000 in debt and $25,000 in available credit, your credit utilization ratio is 16 percent.
FICO doesn’t give a specific credit utilization ratio to achieve a perfect credit score, but it does provide some statistics. Lenders prefer a credit utilization ratio of 35 percent or less.
Length of your credit history
After your credit utilization ratio, the length of your credit history impacts your credit rating the most. It accounts for 15 percent of your FICO score.
When calculating this factor, FICO considers:
- How long your credit accounts have been established, including the age of your oldest account.
- The average age of your accounts.
- How long specific accounts, such as revolving credit, auto loans, etc., have been active, and how long it has been since certain accounts have been used.
The effect of new credit
Applying for new credit accounts has a lesser impact on your credit, but it’s still something to keep track of. It accounts for 10 percent of your FICO score.
From FICO’s viewpoint, applying for several accounts in a short time period increases credit risk and negatively impacts your credit.
However, sometimes consumers apply for multiple loans when shopping for the best rate. FICO recognizes this. For this reason, FICO calculates multiple applications for mortgages, auto loans or student loans made within 45 days of each other as one application.
Your credit mix
If you have a variety of credit on your credit report, it can have a positive effect on your credit score.
Is achieving the best credit score realistic?
Is an 850 credit score possible? Yes.
However, only 0.5 percent of consumers ever reach the 850 score. That’s OK, because a credit score of 740 is usually what you need to qualify for the best interest rates.
Experts recommend that consumers with a credit score of 800 focus on maintaining their score, rather than raising it.