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by Matt Frankel, CFP® | Updated July 21, 2021 - First published on Aug. 11, 2019
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FICO® Scores range from 300 to 850, with higher scores being better. The national average is around 700, and anything above that level is generally considered to be good credit. Anything over a 760 or so will qualify you for the best interest rates on most loans and will allow you to get any credit card or revolving line of credit you want -- provided that your income and other qualifications are strong as well.
So if a 760 will get you pretty much anything you need, it may seem odd that I'm talking about reasons to break the 800 barrier. However, there's a good reason why I'm encouraging you to aim a bit higher. While a score above 800 isn't necessary to get the best credit terms, it's nice to have some cushion.
In other words, if you have a score of 800, you can open a new account, apply for new credit, or charge a major purchase without fear of dropping out of the top tier. All of these things can be expected to cause a mild drop in your credit score, so it's nice to have a margin of safety to absorb minor temporary credit dings.
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Perhaps the most significant reason, at least from a dollars-and-cents standpoint, is that a top-notch credit score can save you thousands of dollars on your mortgage.
The reason is that while mortgage rates are low in general these days, the best rates are reserved for borrowers with top-tier credit scores. And you might be surprised at the savings that can result from a seemingly small difference in mortgage rates. While these rates will certainly change over time, here's a snapshot of the U.S. average 30-year fixed mortgage rates by credit score tier, and what it could mean to you as a borrower, as of this writing:
|FICO® Score Range||Average APR||Monthly Payment on $250,000 Mortgage||Total Interest Paid|
As you can see, a top-tier borrower would save more than $11,000 over the life of a 30-year mortgage as compared with someone in just the next tier down. If your credit is currently in a lower tier, the money you save by building a top-notch credit score would be even more.
An excellent credit score can allow you to get any credit card you want. For example, if you see an excellent balance transfer offer, you should be able to take advantage. The same can be said if you see a great sign-up bonus or a travel credit card with fantastic perks.
While credit card issuers generally don't publish their minimum FICO® Score standards, reports indicate that there is no credit card issuer that requires more than a 750 or so. An 800 or more puts you well within the realm of elite applicants that credit issuers would love to do business with.
Just like with mortgages, car loan interest rates are dependent on the borrower's credit score. In fact, there's even more of a discrepancy between the rates given to customers with top-notch credit and everyone else.
The average APR given on a 60-month new car loan is currently 4.72% to a buyer with a FICO® Score above 720. For someone in the next tier (690-719), the average APR rises to 6.044%. To illustrate the potential difference, a borrower with poor credit can expect to pay a sky-high 17.147% APR for the same exact car loan.
At first glance, insurance may not seem like a credit-related product. After all, when you buy car insurance or homeowner's insurance, you typically pay your premium in advance. In other words, no credit is being extended.
However, insurance companies generally view credit scores as a sign of overall personal responsibility. For instance, someone with an 800 FICO® Score is less likely to cause a car accident, accidentally set their house on fire, etc. Whether you agree with this logic or not, the reality is that many insurance companies use customers' credit scores as part of the process of setting the premium. So a higher credit score can save you significant money on your insurance costs.
As a final reason to maximize your credit score, it's important to point out that many employers will run a credit check on applicants before extending a job offer. This is a controversial use of credit score to say the least, but the logic is the same as for insurance companies -- better credit statistically correlates with higher personal responsibility and trustworthiness.
The most important step in maximizing your FICO® Score is to know how the scoring method works. By understanding the information that makes up your FICO® Score and how it is used, you can take appropriate steps to lift your score over time. With some smart strategies, you might be surprised how quickly your score can increase.
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