In the world of finance, a credit score is used as a quick and simple indicator of your financial history. If you are interested in borrowing money from a lender or even applying for an apartment rental, your credit score is essential.
Having good credit is crucial, but is it possible for someone to get a perfect credit score?
History of a Credit Score
The establishment of the FICO score occurred in 1989. Prior to that year, lenders used personal judgment, zip codes, and references to determine if someone was eligible for funding. This made it hard for many people to get approved for money.
Before the use of credit scores, you could have been denied a loan at the bank simply because you didn’t dress up in business attire. A bank agent would have looked at you and deemed you were ineligible for financing simply because you decided to wear jeans on your day off from work.
The FICO score offered lenders the ability to calculate a person’s financial worthiness through various factors. A credit score can range from as low as 300 to a perfect credit score of 850. Credit scores serve as a financial cheatsheet of sorts. They make the loan approval process unbiased, much to the benefit of hopeful borrowers. Now a person is represented by their repayment history and economic activity.
How Is Information for Your Credit Score Reported?
Credit scores are based on your financial decisions. Any time you inquire for a new loan or pay a bill, your actions are reported by lenders to the credit bureaus.
There are three credit bureaus that collect your financial information in the US:
- Equifax
- Experian
- TransUnion
Credit reports are available to you and the financial institutions with whom you apply for funding. Your financial activity is kept in credit reports for a specified amount of time. It’s essential to keep in mind that specific financial behavior can continue to negatively impact your life several years from now. For example, late payments and civil judgment stay on your credit report for seven years.
The longest penalty is ten years, which occurs to people that file for Chapter 7 bankruptcy. However, not all activity is harmful. If you open a loan account and then decide to close it on your own, that information is also retained for ten years.
How Is a Credit Score Determined?
It may be possible for a borrower to achieve a perfect credit score of 850, but how can someone work to increase their credit score?
The good news is that if you want to increase your current credit score, it may only take 30 days to raise your credit score as much as 100 points. Credit scores are not randomly generated. This means you can quickly and easily learn the steps you need to take to appear more financially responsible to lenders.
When you want to apply for a quick cash loan, you can do so confidently, knowing you’ll get approved with your newly raised credit score.
A credit score is determined through the calculation of five categories:
- Payment History (35%)
- Total Debt (30%)
- Length of Credit History (15%)
- New Credit Inquiries (10%)
- Credit Mix (10%)
As you can see, each category makes up a small percentage of your total credit score.
Payment History
The financial category that affects your credit score the most is payment history. If you pay your bills late, your credit score could drop significantly, and that missed payment can stay on your credit report for seven years.
A simple step you can take to avoid missed payments is to sign up for automatic payments. Your bill amount is deducted right from your bank account for convenience. There are a lot of financial institutions and businesses that offer automatic payments, such as utility companies.
Total Debt Amount
The amount of Personal debt has can hurt or help credit scores. This category focuses on your debt to credit ratio. If you have a credit card with a spending limit of $5,000 that has a balance of $4,000, your credit utilization ratio would be very high.
Ideally, your debt should not exceed thirty percent of your available credit. If you can afford to do so, pay more than the minimum on your credit card bills. Learning how to control your spending can significantly help you get a higher credit limit.
Length of Credit History
The length of your Credit history is the only credit score category you cannot actively change. The older your financial accounts are, the better your score credit looks. Even if you don’t use them, leaving accounts open can help you get a perfect credit score. But keep in mind that lenders often close unused accounts, so read your loan contract carefully. If necessary, make small purchases that you can quickly pay off that same month.
New Credit Inquiries
The highest credit score can be achieved by avoiding new inquiries. If you need a loan to take care of a financial dilemma, keep in mind that your credit score may get lower due to a hard credit check. Whenever a person applies for a loan or credit card, their credit score decreases. Also, pulling up your credit report often for hard credit checks can make you look financially uncertain.
Credit Mix
Using different types of credit can positively help you get the highest credit score. If you maintain a credit limit and a mix of other loans, such as student loans, you could get the highest credit score! Being able to handle multiple financial responsibilities makes you look more appealing to lenders.
What Are the Credit Score Ranges?
Now that you know how a credit score is calculated, you can get started working towards getting a perfect credit score. But is a perfect credit score necessary to get approved for loans?
Just as there are five factors for credit score calculation, there are five ranges:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Excellent: 800-850
You may think that having the highest credit score possible is the best course of action, but it may not be necessary. The highest credit score possible is 850, but the average credit score in the US is only 716.
What Are the Benefits of a Perfect Credit Score?
Most lenders offer approval for scores that are deemed good, so anything above 670 is viewed favorably. So then you may ask, “What is the point of trying to get a perfect credit score?”
The benefit of perfect credit scores is that you may get offered better terms and more financial opportunities. You may get dibs with a perfect credit score when you decide to apply for your dream apartment! Or if you unexpectedly lose your job, you may still be able to get a cash advance loan without a job if you have a prefect credit score.
The higher your credit score is, the lower your interest rates may be! Interest fees are the cost you pay for borrowing money. Lower interest rates mean lower fees, so you can save more than borrowers with higher interest rates.
You may also get offered more available credit. When someone with bad credit applies for funding, that person may not qualify for more than a few hundred dollars. Lenders are not often willing to lend a significant amount of money to people that display financial instability. But with a perfect credit score, you can probably get as much money as you need right when you need it!
If you are financially stable, lenders won’t feel inclined to offset the lending risk. They know you are likely to pay on time, so they offer incentives to try to keep you as a customer.
References:
FICO Score History
How Long Can Negative Items Stay on Your Credit Report?
What is a Credit Score?
