What is a perfect credit score? Using the popular FICO scoring method, the magic number is 850, which is difficult, but not impossible to achieve. By learning how the FICO formula works, we can gain insight into how to achieve a credit score of or near 850.
How the FICO formula works
Unfortunately, the specific formula by which FICO determines your credit score is a closely guarded secret. However, we do know the general makeup of the formula, which gives us some insight into how to maximize our credit score.
Here are the five categories of information that make up your FICO score, their respective weights, and some details on what each category emphasizes:
- Payment history (35% of your score) – The largest category is also the simplest. If you pay your bills on time each month, 35% of your score will take care of itself.
- Amounts due (30%) – This mainly focuses on the amounts you owe relative your available credit or original loan balances, as opposed to the actual amount of debt you have. In other words, a consumer who still owes $ 400,000 on a mortgage that was originally $ 1 million would look better than a consumer who owes $ 100,000 on a $ 110,000 mortgage. even if he owes four times as much.
- Length of credit history (15%) – This category looks at several factors related to time, including the age of your oldest account (whether still open or not), the average age of your credit accounts, and the age of individual accounts.
- Mix of credit accounts (10%) – Creditors want to know that you can handle a variety of debt obligations, not just one. For example, someone with a mortgage, car loan, and credit card in good standing might have an advantage over someone with only one credit card.
- New credit (10%) – This category includes the number of times you have applied for credit in the past year, as well as any accounts you have opened that are considered “new”. As your inquiries progress through the past and your latest accounts age, this category will improve.
There is not just one credit score
90% of lenders use some variation in FICO score when making loan decisions, so it’s safe to say that FICO is the credit score to follow.
However, keep in mind that there is not just one version of the FICO score. To begin with, each of the three major credit bureaus (Equifax, Experiential, and TransUnion) all have their own FICO scores, and your lenders may consider only one or all three. For small credit accounts like credit cards, the lender tends to consider only one, while mortgage lenders typically look at all three.
In addition, there are several editions of the FICO score. The most recent, “FICO Score 9,” made several changes from previous versions in the way it views medical debts and paid collections, but many lenders are still using version eight or earlier. There are also specific FICO scores designed for mortgage lenders, auto lenders, and others.
The point is, even if you check and have a perfect FICO score, that doesn’t mean all of your scores are perfect. It is extremely difficult to have perfect scores in all areas.
So how do you get a perfect score?
To be clear, a perfect score is extremely difficult to achieve. Even if your credit behavior is seemingly “perfect”, you can still miss out on the magic 850.
Since we don’t know the exact formula for FICO, the best way to determine how a perfect score can be achieved is to look at the credit behavior of someone who has done it. In 2014 I wrote a feature article about David Howe, President of SubscriberWise, who simultaneously achieved 850 FICO scores from all three bureaus.
According to Howe, a perfect credit score requires a “perfect storm” of credit strategy and life situations. In other words, it’s not as easy as just paying your bills and keeping your balances low.
By the time he got the perfect scores, Howe hadn’t opened a credit card for about 10 years, no credit check on his report, and small balances on two accounts – a credit card and a mortgage. He also knew the exact data when his credit card statements were closed and reported their balances, and when each office would update their accounts.
Howe also pointed out that having zero credit card debt can hurt your chances of achieving a perfect score. He shared two of his personal credit reports with me. One showed a score of 849 (one point below perfect) and a small credit card and mortgage balance. By simply paying off the credit card, with no further changes, his score dropped to 824 as soon as the report was updated.
Perfect is not necessary, but it is a good idea to maximize your score
To be perfectly honest, it isn’t really necessary (or practical) to aim for the perfect score. Having an 850 may impress your credit checker, but it won’t give you a better interest rate or more credit opportunities than someone with an 800. In fact, a score of 760 or higher should place you. in the top tier for just about any loan you apply for.
However, it may be a good idea to maximize your credit score, which means consciously making decisions that will raise your score (but not obsessing over every point) and avoiding behaviors that will lower your score. After all, just applying for new credit or taking out a new loan can drop your score by a considerable amount. So, the highest practice goal should be a score that can absorb something like this while still staying in the upper level (760+).
For example, if you call your credit card issuer and ask to increase your limit, it could improve your “amounts owed” category relative to your available credit. Right here are other suggestions for increasing your score, if you’re interested.
The bottom line is that perfect credit scores do exist, but you shouldn’t be obsessed with being perfect. A score that is in the top 700 or bottom 800 will qualify you for the best interest rates and provide enough cushion so that you can still use your credit without worrying about it going down, so this is the range you want to use. most people should aim.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.