Into the Stratosphere: Earn (and Keep) an Excellent Credit Score

Consumers with excellent credit scores earn financial benefits that aren't available to those with lower scores. An excellent credit score allows access to lower mortgage rates, and preferred rates credit cards and vehicle loans. The Fair Isaac Corporation (FICO) consumer credit scoring model is the most commonly used and its scores range from 300 to 850, with 850 being the best score. Many creditors and personal finance consultants put the lower end of excellent in the 740-760 range. Credit scoring is used to evaluate credit risk. Mortgage companies, financial institutions and insurance companies review credit scores when making lending decisions pricing insurance policies. Employers may also check job applicants' credit scores as part of the hiring process. Here's how to earn a top credit score and keep it that way.

Components of an Excellent Credit Score

Credit scoring models are based on calculations applied to specific factors in consumer credit reports. FICO reviews five areas and assigns each a value: 35 percent of a consumer credit score is based on payment history, 30 percent is based on amounts owed, and 15 percent is based on credit history length. New credit and types of credit issued are each valued at ten percent. A late payment impacts a credit score more than an inquiry for new credit because of this weighting.

Credit scores are derived from data collected by the three major credit reporting bureaus – Experian, Equifax and TransUnion. While it seems logical that all three credit scores would be the same, scores usually vary within a range of a few points. This can happen when creditors report to two credit bureaus, but not a third. In addition, there are many FICO scores that emphasize different data – a score sold to an auto financing company may be different from one sold to a mortgage lender, and the "educational" one consumers can purchase is different from that.

The accuracy of data contained in credit reports is essential to maintaining an excellent credit score. Mix-ups with identity and reporting errors can cause lower credit scores.

Build Better Credit Scores: An Action Plan

Going from good credit to great credit takes planning, effort and time. Here's how to start:

  1. Review credit reports for errors and unauthorized activity. You can order one free copy of each consumer credit report each year from annualcreditreport.com (a government site), and FICO scores can be purchased for a nominal fee. (Some experts don't recommend paying extra, though, because the "educational" score isn't the same as the one creditors use anyway.) You can get a free credit score, with no credit card required and no obligation, from LendingTree.
  2. Pay all bills on time, every time: Late payments quickly ruin consumer credit scores. Financial tools like reminder apps or automatic payments can prevent overlooked payments.
  3. Reduce debt. The Federal Trade Commission cautions consumers to avoid maxing out credit cards, and people with the highest credit scores have utilization ratios of ten percent or lower. That means if you have $10,000 if available credit to you, you shouldn't carry more than a $1,000 balance. A 30 percent ratio (a $3,000 balance in this example) is considered sufficient for a good credit score.
  4. Don't close older credit accounts. Closing accounts increases your utilization ratio (be removing available credit). Closing an older account also decreases the average age of your accounts, which affects ten percent of your score (new credit).
  5. Obtain a good mix of credit. Installment loans (auto financing, personal loans, and student loans, for example) and mortgages, if paid as agreed, can increase your score significantly, while too many credit cards (especially retail cards) can decrease it. Understand, however, that applying for new credit generates inquiries and can cause a temporary decrease in your score.
  6. Avoid applying for multiple accounts within a short time. Each inquiry causes a temporary drop in your credit score of about five points. While inquiries stay on credit reports for two years, FICO only tracks inquiries made within the most recent 12 months. Rate shopping for mortgages and vehicle loans (if completed within a short time period) is treated as a single inquiry by FICO, and inquiries by you or your existing creditors (these are called "soft" inquiries) don't count against your score at all.

Building and maintaining an excellent credit score requires time and vigilance, but the benefits of high credit scores make the effort worthwhile.

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