A strong credit score can work wonders for your finances. Not only can it increase your chances of getting approved for a loan, but the better your score, the more favorable a rate you’ll snag.
And if your credit score crosses the line into “excellent” status, you stand to benefit even more.
So what’s considered an excellent credit score? A FICO score of 800 or above means you’re likely to gain access to the best rates available.
How credit scores are determined
There are several factors that go into calculating your credit score, and understanding how bureaus arrive at your score can help you take steps to improve it. Here’s a quick breakdown:
- Payment history: An established pattern of paying your bills on time works in your favor.
- Credit utilization ratio: The percentage of available credit you’re using at any given point plays a role in determining your score. Lenders like to see a credit utilization ratio of 30 percent or less.
- Credit history: The length of time you’ve had your accounts open can affect your score as well. Younger borrowers are at a disadvantage here.
- New accounts: Opening too many new accounts at the same time can hurt your score, partially because you may come off as a reckless borrower, but also because each new application results in a hard inquiry into your credit history. While soft inquiries, such as checking your own credit report, won’t hurt your score, hard inquiries can bring it down.
- Credit mix: The different types of accounts you have open also influence your score – meaning there’s a difference between opening up a bunch of store credit cards or having a mix of credit card, mortgage and student loan accounts. Keep in mind that some of these categories carry more weight than others when determining your score. Your payment history and credit utilization ratio play the largest role in figuring your score, while your credit history, new accounts and credit mix play a smaller role. You shouldn’t, however, take that to mean that it’s OK to ignore any single component on the list.
Benefits of excellent credit
Having excellent credit isn’t just a matter of pride; it’s a matter of getting the best financing terms available whenever you attempt to borrow money.
Say you’re applying for a $300,000, 30-year fixed mortgage. With excellent credit, you might snag a 3.696 percent APR, which translates to a monthly payment of $1,380. A score that’s good but not excellent, meanwhile, will get you a 4.095 percent APR with an associated monthly payment of $1,449 – still competitive, but not nearly as attractive.
Similarly, some of the top-tier credit cards out there are designed specifically for folks with excellent credit. These cards offer perks such as generous sign-up bonuses, killer rewards programs and low or non-existent annual fees.
Of course, consumers with good credit have their share of credit card options as well, but to be eligible for the very best offers out there, you’ll need to hit that excellent range.
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