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You have most likely heard that having a good credit history is very important for your financial health. What’s more, having an excellent credit score can help you qualify for the best credit cards and loans with low interest rates and preferred terms.
To better understand what a great credit score is – usually 800 or higher – and why it’s important, keep reading.
What is an excellent credit score?
While you don’t need an excellent credit score (also called an exceptional credit score) to qualify for decent loan products, the higher your score, the more options you will have. Having a good credit score ensures that you can also qualify for great loan products and fair rates and terms, but having a score over 800 doesn’t hurt. As an added bonus, having such a high score gives you a bit of wiggle room in case your score drops.
Credit requirements and credit scoring models vary among lenders, but many rely on FICO for their credit scoring needs. The FICO scoring model considers a score of 800 or greater to be excellent, while VantageScore, another popular model, considers anything above 781 to be excellent.
Why a great credit history is important
Lenders use credit scores to determine how creditworthy an applicant is. The higher someone’s score, the more responsible they have been in the past. If you have a bad credit score, lenders will worry that you won’t be able to pay off your debt on time. That’s why they tend to offer higher interest rates for bad credit borrowers.
By charging higher interest rates, lenders reduce their risk. In case the borrower defaults on the loan, the lender has already made some money in interest payments to make up for their losses. On the other hand, if you have a good credit score and a history of making payments on time, the lender is likely to charge a much lower interest rate because you pose a lower risk of default.
Having an excellent credit history can also make it easier to rent an apartment, find a job, access utilities, and lower insurance rates.
FICO vs VantageScore
The two most popular consumer credit scoring models are FICO and VantageScore. Everyone defines and ranks credit scores differently. Here’s how the models differ:
| FICO | VantageScore | |
|---|---|---|
| Credit score and score range | Exceptional
Excellent Good Fair very poor |
Perfect
Good Fair Poor very poor |
| Weight Estimation |
|
Ranked by order importance:
|
How to create an excellent credit score
It takes time to build a great credit score, even if you always pay your bills on time. Whether you’re just starting out on your credit journey or need to repair a damaged credit score, these steps can help you build a good credit history.
Make timely payments
The best way to improve your credit score is to pay your bills on time every month. When you make payments 30 days late on loans that lenders report to credit bureaus (such as credit cards, mortgages, auto, student, and personal loans), your credit score can drop by 100 points or more.
Reduce your credit utilization ratio
Your credit utilization ratio measures how much of your credit you use compared to how much is available, and you want this ratio to be as low as possible (below 30 percent is a good rule of thumb, but again, the lower the better). ).
To lower your credit utilization rate, you can pay off revolving forms of debt, such as credit card debt, to use less available credit. It can be helpful to keep old credit cards that you no longer use open – this way your total loan amount will be higher, which can make it easier to maintain a low credit utilization rate.
Become an authorized user
If you’re struggling to get new credit cards yourself, you can ask to become an authorized user on an existing user account (such as a spouse or parent). When you do this, you will be given a credit card linked to the account of the main account holder, but he or she will be responsible for payments, so make sure you both have a plan in place for how you can use the card. When the account holder makes timely payments, you receive credit for them, which can help you improve your credit score and make it easier to get your own credit cards in the future.
bottom line
Working towards a great credit score can take years of hard work and discipline, but it’s a doable and certainly worthy goal. Once you have an excellent credit score, you can qualify for the best credit cards with the lowest interest rates and the best terms.
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