Takeaways
- High credit scores give you lower rates on loans and credit cards.
- The two most popular credit scores are FICO and VantageScore.
- Focus on factors like making on-time payments and credit utilization.
- Increasing your score beyond 800 might not yield a differentiating experience.
- Keeping your credit score high will give you better financing options.
What is your credit score? Credit scores of 800 or above are highly coveted because they are considered excellent. This means your credit report has a clean history, and credit-scoring companies have deemed you highly dependable when paying debts.
As a result, credit card companies will give you lower Annual Percentage Rates (APR) and better rewards. Additionally, you will command lower interest rates on new loans like mortgages or car loans relative to other lenders.
Smart Money -> Deep Dive: What is a Credit Score?
FICO vs. VantageScore
The two most prolific credit-scoring companies are FICO and VantageScore. These two credit-scoring companies produce the lion’s share of credit scores. The FICO score is used by over 90% of prominent lenders.
FICO and VantageScore both use a scoring system that assigns a three-digit credit score between 300-850. These scores help lenders make decisions about credit approval, terms, and interest rates.
FICO
FICO scores are the most widely used credit scores. FICO scores are considered the industry standard because they are the most widely used by lenders to assess a consumer’s creditworthiness. The scoring system uses data from all three credit reporting companies: Experian, Equifax, and Transunion.
Smart Money -> Deep Dive: How is a FICO Score Calculated?
According to the FICO website, a FICO credit score of 800 or more is considered exceptional. This means you are well above the average credit score and demonstrates to lenders you are a phenomenal borrower.
Smart Money -> Deep Dive: What is a Credit Score?
Smart Tip:
As of April 2022, the average consumer in the U.S. has a FICO score of 716. What is your credit score?
VantageScore
Vantagescores are also widely used credit-scoring models. The three credit bureaus – Equifax, Experian, and TransUnion –created the VantageScore in 2006 to compete with the FICO score.
According to the VantageScore website, using VantageScore 3.0, a credit score of 800 or more is considered SuperPrime (the range is 781-850). The SuperPrime moniker is the best rating consumers can have with VantageScore 3.0 and shows lenders you are an exceptional borrower.
Smart Money -> Deep Dive: What makes a Great VantageScore Score?
Smart Tip:
As of December 2022, the average national VantageScore score was 696. What is your credit score?
5 Ways to Increase Your Credit Score
1. Make On-Time Payments
Making on-time payments consistently will boost your credit score dramatically because it is the highest factor in calculating your FICO or VantageScore credit score. While it takes up to 6 months to see the full effect of diligent payments work their way through the credit-scoring process, the effort is worth it.
Credit mishaps and missed payments can damage your credit history quickly, but building your credit can be achieved with financial prudence. One of the best ways to make sure you make on-time payments is to take out loans you know you can repay. This will help your credit utilization too.
2. Decrease Credit Utilization
Right behind paying your bills on time is your second highest factor in determining your FICO and VantageScore credit score, your credit utilization. Credit utilization is one definition with multiple components. The first is your total debt outstanding. This means all your debt from credit cards, auto loans, and mortgages. The second component is the total credit limit. Your credit limit is the maximum amount a lender will allow you to borrow per account.
Paying off your debt and increasing your credit limit will improve your credit score.
Smart Money -> 5 Steps to Lower Your Credit Utilization
3. Control Credit Applications
Multiple credit inquiries in a row for new credit applications can cause a dip in your credit score. Although this will only be short-term, it may affect your lending terms. Many consumers haphazardly apply for credit cards. The smart money move is to conduct due diligence on the best credit cards and only submit applications to the best ones.
4. Diversify Your Credit Types
Your mix of credit matters. Lenders like to see you pay off various types of credit: credit cards, car loans, mortgages, and personal loans.
By consistently making payments on assorted types of credit, lenders become more comfortable with your ability to make on-time payments. That is why credit-scoring companies factor this into your credit score.
5. Increase Length of Credit History
Another major factor that credit-scoring companies analyze is your length of credit history. Your average length of a credit line is a significant variable for credit-scoring companies like FICO or VantageScore.
Smart Money -> Increase Your Credit Limit Step-by-Step
Carefully consider closing any credit accounts. If you have unused credit cards, keep these lines of credit open. Once these credit cards are paid in full, increase your credit limit. Both actions can hike your average length of credit and credit utilization.
Smart Money -> How to Pay Off Debt Fast in 5 Easy Steps
Why an 800 Credit Score Matters
With credit scores, higher is better. When purchasing a car, or home, or opening a new credit card, lenders will conduct a hard inquiry on your credit.
Smart Money -> Best Credit Cards of 2023
Smart Tip:
A hard inquiry means a lender or company has requested to review your credit report to help determine your eligibility for a suite of credit products. Hard inquiries typically impact credit scores, and multiple inquiries by lenders like auto loans or mortgage lenders are considered one inquiry.
A high credit score can help you get access to the best lenders have to offer. Here are some items great credit scores can help with:
Credit Cards: When researching the best credit cards, it is vital to understand that the higher your credit score, the better your chance of securing an amazing credit card. Great credit cards offer lower interest rates and higher benefits for you. If you are still trying to build your credit, consider a secured credit card.
Car Loans: With a FICO credit score of 800 or VantageScore of 800 or more, prepare yourself for the best car loan options. Make sure to shop around and get the lowest rate possible. Some auto dealers like to provide direct financing, but your bank may be willing to provide cheaper financing options.
Mortgages: A high credit score can determine where you live, literally. If you are a first-time home buyer, having a great credit score will give you access to the best terms for a new mortgage. The higher your credit score, the lower the interest rates lenders generally provide.
Rent Applications: If you live in a metropolitan area like New York City, San Francisco, Los Angeles, or Chicago, the renter’s market can be insanely competitive. A high credit score will help you stand out among applicants to high-demand neighborhoods.
Personal Loans: You never know what life will throw at you. It is better to be prepared by having access to a personal loan to help navigate large purchases, home renovations, and more. With some shopping around, a credit score of 800 or more will give you the best low-cost options.
Smart Summary
An excellent credit score will help all aspects of your financial life. You can command better terms, lower interest rates, and credit card benefits. These perks come at the cost of financial planning, budgeting, and paying off your debts on time. Defending a high credit score takes as much effort as building your credit to achieve a high credit score. The financial diligence necessary to earn a credit score of 800 or more is a smart money decision.
Frequently Asked Questions
A credit score is assigned to consumers to help lenders assess their creditworthiness. Your credit score is a number between 300-850. Some consumers with great credit scores enjoy rewards from securing the best credit cards.
Focus on the two most heavily weighted factors in calculating your credit score: paying bills on time and credit utilization. Quickly paying off your debts will help both factors and increase your credit score over time.
Think about improving your credit score monthly. Lenders report payment history to credit reporting companies every 30 days. If you focus on the most critical factors in your credit score, you can improve your score by 100 or more points
The short answer is: Yes. Diversifying types of credit can boost your credit profile and elevate your credit score. High-impact changes include not missing payments, paying off your debt, and asking for a credit limit increase.
