How Can you Earn an Excellent Credit Score: A Complete Guide
Your credit score is incredibly important. Those three digits can impact everything from your education to your career and your finances; they’ll dictate whether banks consider you mortgage-worthy or refuse to even give you a credit card.
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A bad credit score can make life very difficult and trap you in a cycle of debt, with fewer options, higher interest rates, and a feeling like you’re stuck in a rut. A good score, on the other hand, could provide you with the helping hand you need to live the lifestyle you seek.
But what does it take to earn an excellent credit score, what is the ideal credit score, what are the potential pitfalls you need to avoid and how can you improve key aspects such as your debt-to-income ratio and credit utilization ratio?
In this guide, we’ll answer those questions and more, telling you all you need to know about acquiring the perfect credit score.
What is an Excellent Credit Score?
The total possible range for a credit score is between 300 and 850, while a good credit score is anything above 700. An excellent credit score would be anything above 800, which is quite difficult to achieve. This is true for both the FICO and VantageScore method. In the past, VantageScore used a wider range, but this caused confusion with some consumers, so it has since adopted the same range.
This score is much more common than you might think. In fact, according to Experian, one of the three leading credit bureaus, 21% of consumer credit scores fall within this range.
What is the Highest Possible Credit Score You Can Achieve?
850 is the highest credit score you can receive and is considered exceptional. It won’t make that much of a difference whether you have a score of 849 or 850. You’re unlikely to see much difference between 801 and 850. However, it may reduce interest rates by a few points and if nothing else it’s a badge of honor you can wear with pride.
With that in mind, how can you get a perfect credit score?
Your first step should be to get a free credit report and see where you stand. If you have a low credit limit, lots of high-interest credit cards, and some missed payments, it’s going to be an uphill battle. If you have a relatively good credit score with no derogatory marks, it will be much easier.
The next step is to understand how your credit score is calculated. This is something we have discussed before, quite extensively, but here is a brief recap:
- History = 35%
- Utilization = 30%
- Age = 15%
- Variety = 10%
- Checks = 10%
There is no quick and easy way to get a perfect credit score and you may have to go backward to go forward. As an example, if you have a lot of credit cards but nothing else, then the only way to increase the “Variety” is to get a personal loan, an auto loan or even a home loan—none of which are recommended if your only goal is to increase your credit score.
If you have very little on your credit report except for the odd loan or card, then opening more accounts will improve your Utilization and Variety in the long-term, but your Checks and Age will take a short-term hit.
The important thing to remember is that providing you have a good score, you’re okay. Just focus on meeting repayments and keeping your head above water and don’t take extra credit just for the sake of it. If you have a bad score, you need time, patience, and persistence, and if you have a great score then there’s no need to push for the perfect credit score.
In any case, there are a few ways you can improve your score and get close to perfection without acquiring unnecessary credit:
- Meet Payments: It’s a no-brainer, but it’s something that needs to be drilled into every borrower. Missing a single payment can have a hugely negative impact on your credit score and trigger a domino effect that leads to bad credit, mounting debt, and a whole host of issues. Meet the payments every month and your Payment History will remain solid while your Account Age improves.
- Increase Limits: Ask lenders to increase the limits of your credit cards and try to avoid using those increased limits. This will greatly improve your available credit without impacting total debt, thus improving your Credit Utilization score.
- Rate Shop: If you need a new loan, be it a home loan or auto loan, make sure you shop within a window of 14 days. This is known as “rate shopping” and means all inquiries will be merged into one. Some credit scoring systems go as high as 45 days, others are between 14 and 30 days. To be on the safe side, squeeze all inquiries into 14 days and keep credit card inquiries to a minimum as these all count separately.
- Clear Mistakes: If there are incorrect missed payments, false accounts, and unsolicited hard inquiries on your credit report, contact the credit bureaus and ask for them to be removed. These mistakes happen and are much more common than you might think, which is why it’s important to check your credit report regularly.
- Keep Accounts Open: If you clear multiple credit cards, don’t be tempted to close them as doing so will drastically reduce your Credit Utilization and could leave you much worse off. Keep cleared credit cards open where possible but try to avoid using them to accumulate debt.
What are the Benefits of an Excellent Credit Score?
When you have a good credit score, the world is at your feet. Lenders chase you, loans are easy to come by, and you can get great rates on home loans and auto loans. We live in a buy-now-pay-later society where credit is king and individuals with excellent scores are treated like royalty.
Benefits of an excellent credit score include:
Access to Better Credit
If you have little to no credit, your options with regards to credit cards are pretty limited. You might be refused altogether, you might be offered cards with high rates, high penalties, low credit limits, and no perks. If you have a high credit score, however, then a new world of possibility opens up.
The average APR drops half a dozen points, cashback perks become the norm, and if you’re earning good money you may even qualify for premium cards, such as the Amex Gold or Platinum cards.
Much Lower Interest Rates
Lenders charge higher interest rates to consumers with bad credit because they constitute a greater risk. These increased rates help them to account for the fact a large number of bad credit users will default.
To a consumer, these rates can be as high as 6% or 7%. If we assume a credit card debt of $10,000 repaid over 60 months, we can see that the difference of 7% is massive:
- Bad Credit (26% APR): Total Paid = $17,964
- Good Credit (19% APR): Total Paid = $15,564
In this example, you’ll have nearly $2,500 extra in your pocket just because you have a better credit score. That’s 25% of the original debt!
Cell Contracts and Personal Loans
How many times have you seen a great deal for a cell phone contract or a short-term personal loan, only to be rejected outright or charged a much higher interest rate when you actually apply? Where cell phone contracts are concerned, you may even be required to pay a security deposit.
If you have excellent credit, this shouldn’t be an issue. Cell phone contracts, personal loans, and financing options offered by many retailers should all be available for you at reduced interest rated and with additional perks. However, make sure you don’t take too many of these offers as your score will gradually reduce for each one.
Housing is Easier
Landlords run credit checks on tenants to calculate risk and determine if they can meet repayments. If you have a poor score and a credit report littered with bad marks, your chances of renting a home or apartment will be slim. This applies to mortgages as well, making it difficult to find a home and gain a little independence.
Better Auto Rates
You will get better interest rates on auto loans and may also pay less for your car insurance, as credit scores are one of the many things that insurance companies factor into the equation. Individuals with a poor credit score won’t necessarily be refused insurance, but they will be penalized with higher rates.
We live in a country where healthcare is charged at a premium and in a world where no job is safe. You don’t know what’s around the corner. An excellent credit score can act as your safety net in lieu of savings. You know that if you lose your job, suffer an illness, or need to make sudden changes in your life, your credit score will make your life easier by allowing you to take low-interest loans, credit cards, and mortgages.
Hospitals will be more willing to negotiate, future employers will be more receptive to applications, and you will have an easier time regaining your footing.
How Long Does It Take to Improve your Credit Score?
This is not a quick process, unfortunately. We have previously looked at ways you can improve your credit score quickly and these methods are effective for short-term improvements. However, you’re not going to go from a fair score to an excellent one in just a few months and if you have lots of recent derogatory marks on your account, you’ll be lucky if that change happens in under 5 years.
These things take time.
Credit reports are updated monthly, with all payments, new accounts, and inquiries from that month being added. You can generally offset some negative marks by meeting payments, reducing inquiries, and increasing your limits for a few months, but many marks will take years to leave your credit report, as discussed a little further down.
What is a Bad Credit Score?
A score below 580 is generally considered “Very Poor”. This is actually quite rare. In fact, recent statistics suggest that 84% of Americans have scores of 580 or more, with 67% on 670 or higher (classed as a “good” credit score). It takes a lot of mistakes to get a credit score below 580, but many of those mistakes may not be your fault or may have resulted from circumstances that were out of your control.
For instance, if you acquire student loans and credit cards before earning a steady income, you could find yourself in a position where you can’t afford to meet monthly repayments even though all your money is going on rent, food, and education. This is enough to seriously damage your score and drop you into that “very poor” range.
The same is true for anyone who has been the victim of fraud, which is why it’s important to read your credit report regularly, making sure all listed credit cards and loans are actually yours and that all hard inquiries were initiated with your permission.
How Long Does It Take for Something to Disappear off your Credit Report?
Nothing remains on your credit report forever, but the worst derogatory marks will stay there for up to ten years:
- Hard Inquiries – 12 to 24 months: These will disappear after 24 months, but the damage done to your score will be offset after just 12 months. These credit inquiries occur when you apply for credit and loans. Unless they were initiated by mistake or fraud, there is nothing you can do to remove them.
- Missed Payments – 7 years: If you miss a single monthly payment then it may appear on your account, which is why it’s important to make all payments on time. Do whatever you can to avoid missing a payment as you can’t remove this mark in under 7 years. Its impact on your score will lessen over time.
- Foreclosure and Repossession – 7 years: The scary thing about repossessions is that they can occur with little warning. They are the result of missed payments and lender frustration and can occur on all secured debts.
- Charge-offs – 7 years. If you don’t meet your monthly repayments then the lender may write the debt off, triggering a charge-off. These will stay for the full term, but you should seek to settle the debt with the lender, thus negating the risk of legal action and further financial complications.
- Collections – 7 years: If you don’t meet monthly repayments then your lender may sell the debt to a collections agency. You will be then required to settle it. Settled collections show on some credit scoring systems, but not all of them. However, while the mark will remain for 7 years, its damage will gradually reduce.
- Bankruptcy – 7 to 10 years: Chapter 7 bankruptcy will remain for 10 years while Chapter 13 remains for 7 years. These are often seen as easy ways to escape debt, but they should only be used as an absolute last resort because the damage done to your credit report can be significant.
Most of the derogatory marks occur with your knowledge, from hard inquiries that you initiated to payments you missed and new accounts you opened. But it’s also possible for your score to drop without any obvious cause. For instance, you may have closed a credit card, thus reducing your credit utilization ratio.
Your credit utilization ratio compares total debt to available credit and can be affected when either one of these decreases. It may seem counterintuitive, but the best way you can prevent this is to keep old credit cards open even after you have cleared them and even if you have no intention of using them again.
To learn more, take a look at our guide on Why Did my Credit Score Drop?
What Can Happen if You Have a Poor Credit Score?
Lenders may want nothing to do with you if you have a poor credit score. The ones that do will charge you extortionate interest rates and these rates could lead you further into debt.
If your score is so bad that you’re being refused, you may be better off giving those high-interest loans and credit cards a miss and focus more on rebuilding your credit first. This should benefit you more in the long-term.
How to Go from Bad Credit to Good
Bad credit can trap you. If you’re ever going to achieve a perfect credit score then you need new credit accounts, but if you’re being refused those credit accounts at every turn, there’s not much you can do.
There are two things to keep in mind here. Firstly, most credit will allow you to build your score and not all of it is hard to acquire. Take secured credit cards as an example. A traditional card is unsecured, which means there is no collateral behind it (such as a house or a car). If you don’t pay, they can’t simply take an asset and then sell it to cover the debt.
But some credit card companies offer secured credit cards. These cards function much like a prepaid card in that you give them money, that money is added to the card, and then you use the card to spend it. Although it seems like a pointless endeavor, it gives you a secure and convenient way to spend and it helps to improve your credit score.
If your score is poor because there’s very little on your credit report, these cards are ideal. You should also consider lending circles, which we’ve discussed elsewhere.
If it’s poor because you have masses of credit card debt, loan debt, missed payments and/or collections, it’s a different matter entirely. In this case, time is on your side.
Let’s suppose that you have missed loan payments, have growing credit card balances, and your credit report is littered with hard inquiries. If you meet all payments for a year, increase credit limits where possible, and don’t apply for any new credit, those inquiries will no longer hurt your score, the damage done by the missed payments will decrease, and you’ll be rewarded for improving your payment history and credit utilization, which accounts for close to two-thirds of your score.
A big improvement will be made simply because you knuckled-down and rode the storm. If your accounts are spiraling out of control and you can’t afford to meet payments, however, then look into a debt consolidation loan or a debt management plan.
Summary: Good Credit, Bad Credit, and Stable Credit
The United States is stuck in a cycle of easy credit and endless debt. The average American uses credit to pay for their education, their first car, their first home, their marriage—by the time they hit their 30s, they’re drowning in masses of loan debt and credit card debt.
This is the norm and it’s why three-quarters of the population will die with some form of debt. But for many, it’s perfectly manageable and not something that impacts their day-to-day. According to official reports from the American Banking Association, there are 75 million active “subprime” credit accounts, but there are 185 million “superprime” accounts.
An excellent credit score is achievable. The problem for many is that it’s so easy to slip from one state to the other due to:
- A Change in Income: There are 57 million self-employed individuals in the US, every one of which is subject to changing work circumstances that could lead to them going several months with very little money to pay their debts.
- Unemployment: The unemployment rate has been dropping, but this is a risk that millions face every day due to redundancy, mergers, corporate bankruptcies, and illness.
- Medical Bills: The US spends more than any other country on healthcare and is one of the few developed nations that can turn a short-term hospital stay into financial ruin.
- Student Loans: The average student loan debt is around $27,000, but for some, such as those going through medical school, it climbs above $200,000. If your chosen career doesn’t work out, this debt can stay with you for years to come.
The good news is that there is always a solution, from debt management to debt consolidation and from debt settlement to bankruptcy. The important thing to remember is to check your credit report regularly, try to actively improve your credit score when you can, and avoid making unnecessary decisions that will damage it.
In a country increasingly fueled by credit, lenders are king, so work on building a good credit score to guarantee the best rates and perks when you need them.