From Good Credit to Great Credit: It's Worth the Effort

If you have good credit (often defined as a FICO score between 680 and 739), congratulations! You have many more opportunities available, and you'll pay less for them, than consumers with fair or poor credit. The median credit score in the US (720) is in the good range.

Excellent Credit: What's it Worth to You?

You could do even better with your credit, and it's well worth the effort. Here's how much you might save by having excellent credit:

Mortgage -- See how credit scores affect mortgage rates by checking out offers on LoanExplorer by LendingTree. As of this writing, an applicant with a "good" score of 680 - 699 can get a 30-year loan at a 4.068 percent APR. Those with "excellent" FICOs of 740 or higher get 3.688 percent. For a $200,000 mortgage, having excellent credit saves you $43.48 per month.

Auto Loans -- There's a huge difference between automotive financing rates for people with good credit (6.701 percent) and those offered to consumers with FICOs of 720 - 850 (3.211 percent). Get your score up to "excellent" and you'll pay nearly $3,000 less to finance a $20,000 car for four years.

Credit Cards -- Moving from good to excellent can really pay off here, because with unsecured borrowing, it's all about your credit rating. Rates on LendingTree for excellent credit range between 8.00 and 12.99 percent for excellent credit, but jump to the 10.9 to 14.99 range for good credit.

Personal Loans -- Personal loans are also unsecured, so your credit rating really influences your interest rate. Rates for a three-year personal loan on peer-to-peer sites and online lenders range between 11 and 15 percent for people with good credit, but drop to between five and eight percent for those with top credit scores.

Excellent Credit Score: How to Achieve It

Getting to "excellent" takes some effort, but maybe not as much as you think. Your plan of action should include regularly monitoring your score (easy and free to do here at LendingTree).

Payment History

One of the most important tactics for excellent credit is avoiding late payments -- a single 30-day late mortgage payment does a lot more damage to a good or excellent score than it does a fair one.

Here are the numbers from FICO for three different credit scores:

  • 680 -- FICO drops 60 to 80 points into the "poor" to "fair" range.
  • 720 -- FICO drops 70 to 90 points into the "fair" range.
  • 780 -- FICO drops 90 to 110 points into the "fair" to "good" range.

Your main priority, then, should be keeping black marks out of your credit history.

Credit Utilization

Almost as important as your credit history is a ratio called "credit utilization." That's the relationship between the amount of credit you have available to you and the amount that you use. To achieve a "good" score, experts recommend using no more than 30 percent of your limit, which is $1,200 of a $4,000 credit limit. However, consumers in the "excellent" credit tier use much less -- closer to ten percent.

What about lowering the ratio by opening up more accounts? If you only have one or two cards, adding another can help, because FICO's research indicates that people who max out a single card (easy to do in an emergency) are more likely to miss future payments. However, opening up new accounts can also cause your score to drop temporarily, because your application for credit results in an inquiry. If you are granted credit, adding a new account can also drop your score by reducing the average age of all accounts. Asking your current creditors for an increase in your credit limit is probably a better choice if you have several cards already.

Inquiries

To achieve excellent credit, keep the number of applications for credit (inquiries) to a minimum. A single inquiry typically causes a five point drop in your credit score. While scoring systems won't penalize you for rate shopping an auto loan or mortgage (the newest version of the FICO system combines all inquiries for those things within a 45 day period), a slew of inquiries for other loans can really hurt. Why? Because people with six or more inquiries on their credit reports can be up to eight times more likely to declare bankruptcy than people with no inquiries on their reports, says FICO. Right now, you have good credit, so don't apply for credit cards that are only approved for those with excellent credit. You'll be turned down and you'll have extra inquiries as you search for an approval.

Once you achieve an excellent rating, however, the credit world will be your oyster. Apply for the best products available -- you'll have earned them.

 

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