Why 850 isn’t really the perfect credit score

It’s a myth that you have to have a perfect 850 credit score to get the best rates on loans and other financial products.

If you aren’t a member of the elusive “perfect credit score” club, don’t sweat it.

[See: 12 Simple Ways to Raise Your Credit Score.]

There isn’t a single credit card or loan product that requires an 850 credit score. In fact, research has shown that the truly ideal credit score — the magical benchmark at which you’ll almost certainly qualify for the best rates — is 760 and sometimes even lower. So, you can be 90 points off from perfect and still get preferential treatment from lenders.

The lowest rates offered on mortgage loans are being approved for people with scores at 760 or higher, according to Informa Research, which tracks interest rates by credit scores on a daily basis. Their research powers the mortgage tool featured on myFICO, the consumer-facing site behind FICO, which is the credit score generally used by lenders in the United States.

For other products, such as auto loans, you are still considered a “prime” consumer with a credit score of 661 and above, according to Experian’s latest auto lending report. Consumers with scores between 661 and 780 are in the “prime” lending category, and people with scores above 781 are considered “super prime.”

[See: 10 Easy Ways to Pay Off Debt.]

How to get a credit score to 760 or higher. Hopefully, you’re feeling a bit less pressure to hit 850 now. But you should still focus on building your credit score as high as you can in order to get the most favorable rates on loan products (not to mention a boost on things like auto insurance rates and even your next apartment application).

The good news is that a score of 760 means you don’t have to be 100 percent perfect. You could have one or two older missed payments on your credit report and still get there.

[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]

Focus on the following three things you can do right now to improve your credit score.

1. Use 10 percent or less of your available credit limit. If you’ve got three credit cards for a total available credit limit of $10,000, then you should try your hardest never to carry more than $1,000 across all three cards at the end of each statement period. Why? Because at the end of your statement period, your credit card will report your statement balance to the credit bureaus. And the more available credit you are using, the worse it will be for your credit score. You could do fine by keeping your credit use to 30 percent or lower, but you’ll increase your chances of getting into that 760-plus territory if you aim for a 10 percent or lower utilization rate.

2. Pay on time and in full every month. Your payment history makes up a whopping 35 percent of your FICO score. Let that sink in for a minute. Simply by making on-time payments, you’re going to see your credit score begin to improve markedly (of course, if you have a lot of negative marks on your credit report, it will take longer to see progress, but keep at it).

3. Pay down debts. If you are struggling to pay down old debts, take a step back and get organized. There are two popular and proven methods to pay down debts. They’re called the “snowball” and “avalanche” methods. With the snowball method, you will order your debts from the smallest amount to the largest. Focus on paying off the smallest balance first while making minimum payments on your other debts. Once you’ve paid off that small balance, put all the money you were using for that debt into the next debt on your list. Slowly you will build momentum and get in the habit of paying off debts.

The avalanche method is a little different but also effective. List your credit card debt from the highest interest rate to the lowest. Put all of your extra money toward the most expensive debt until it is eliminated. Once that debt is paid off, take whatever you were paying on that bill and apply it to the next debt on your list, plus the minimum required payment from the debt you just paid off.

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Why 850 Isn’t Really the Perfect Credit Score originally appeared on usnews.com

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