Each year, credit scores climb higher and higher. According to data collected from FICO, the most common scoring model used in the US, the average rose to 716 in 2021. That’s eight points higher than it was a year before.
Despite these improvements, 716 is still a far cry from the perfect score of 850. Perfect credit is still very much an exclusive club, with roughly one percent of consumers boasting this VIP number.
Credit: ViDlstudio via FreePik
But is achieving a flawless 850 out of reach? Below, you’ll find out how a perfect score can improve your life and what you need to do to raise this number.
Why Improving Your Score is Vital to Your Financial Health
Borrowing money through a financial institution will always cost money, but you’ll pay more in fees and interest when your score is low. That’s why financial advisors recommend raising your score before taking out a personal loan or line of credit. You’ll reduce what you pay to borrow this way.
Does this mean you can’t ever borrow with bad credit? Not at all. Sometimes, it’s impossible to put off borrowing, even when you wish you could.
Maybe your car stalls out of the blue, and you’ve just drained your savings account to cover an unrelated repair to your roof. An online loan can float the cash you need and help you get back on your financial feet.
If you’re facing a similar emergency, you may find a loan for which you can apply online with bad credit, but make sure it’s something you can afford. Shop around to get the best rates available with your credit score and confirm it fits your budget.
It’s best to think of online loans as a safety net used as a last resort due to their cost. If it’s safe to put off a repair or purchase, you can try raising your score until you get a better rate.
Your Score Affects More Than the Interest Rates on Loans Online
Your score has influence far beyond the rates you pay on online loans. It may also affect how easily you get a job, rent an apartment, or secure auto insurance.
Jobs: Some employers may check your credit if you’re applying for a financial or security position. Whether you agree or not, they use this check to gauge your trustworthiness in the role. A low score could cost you a position, especially if an employer uses it as a tie-breaker between you and another candidate.
Housing: It’s common practice for landlords to review the scores of applicants to determine the chances they’ll pay rent on time.
Insurance: Some insurance companies have their own credit-based insurance score, which uses information from your financial report. Generally speaking, a low financial score will result in a lower auto score, which may increase your premiums.
How to Improve Your Score
Between lower rates on online loans to cheaper insurance premiums — there are a lot of benefits to having a perfect score. But is it possible?
Yes, but it takes time.
A perfect score is equal to a spotless record. That means absolutely no negative entries on your file. You can never pay a bill late or carry a large balance on a line of credit or credit card, and you better forget about any big delinquencies like a charge-off, account in collections, or bankruptcy.
Besides the absence of bad entries, you’ll also have to pack your file with good financial habits. Here’s what you need to do to achieve a perfect 850.
1. Pay Bills on Time
Your payment history has a lot of sway over your score, so you’ll never want to miss a due date. Paying bills on time won’t always add a positive entry to your record, but it will keep negative delinquencies off your file.
2. Keep Your Utilization Ratio Below 10%
Your utilization ratio refers to the balance you carry over on lines of credit and credit cards. People with perfect scores almost never carry over a balance. If they do, it never surpasses 10% of their total available limit.
3. Have a Selection of Accounts
Having a wide variety of accounts in your file shows the scoring models how you handle different kinds of credit. You’ll be sure to impress as long as you pay promptly and keep your utilization ratio low. This tells the financial world you’re responsible, no matter what.
4. Collect a Long History
Scoring models reward large sets of data. The more information your record holds, the more accurately they can predict your behavior. As a result, you’ll earn a bump for long-standing accounts, provided you keep them in good standing.
5. Don’t Rock the Boat
Most people with a perfect score rarely open or close accounts. Either process will cause your score to dip temporarily.
6. Wait
Perfect credit doesn’t happen overnight. It takes time for your lenders and creditors to share information about your accounts.
You may also have to wait for derogatory marks to expire before good entries get the spotlight. Delinquencies, charge-offs, and bankruptcies will remain on your record for seven to ten years. Until they lapse, these bad marks will drag down your score, even as you adopt good habits.
The Takeaway:
It may seem like a perfect 850 is the stuff of legends, but it boils down to a handful of specific financial habits. You can slowly improve your score by focusing on paying bills on time and reducing your balances as you wait for bad entries to expire.
With this in mind, improving your score is more of a marathon than a sprint. While you may not see an immediate boost to your score, your good money habits will pay off in the long run.
