What is excellent credit? That's a good question, because some people don't use the term, preferring to divide consumer credit scores into just three categories: good, fair and poor. However, there's an increasing trend to use four tiers, and LendingTree and most others define excellent credit as a score at the very top of the range: one above 720 and all the way up to the maximum possible, which is 850.
One Consumer, Many Credit Scores
Anyone told that her score is near the top of that range can be pretty confident that everyone will regard her score as excellent. But those closer to that magic 720 threshold should be aware that their status is less certain. That's because most consumers have multiple scores, and the fact that one is in the excellent range might not mean they all are.
This arises as a result of there being two main scoring systems (FICO and VantageScore) and three main credit bureaus (Equifax, Experian and TransUnion), each of which can place a different weight on an event in a consumer's financial history. To make things more complicated, lenders may access current or old versions of the technologies used by all five. While every score is based on the same information (that contained in consumers' credit reports, which mainly comprise a list of accounts, credit applications, payments, defaults, foreclosures and bankruptcies going back at least seven years), a single consumer frequently has literally dozens of scores, and some report a spread of 50 points or more between their top and bottom numbers.
It's worth noting that VantageScore used to use a 501-990 score range, but the latest version of its software mirrors FICO's 300-850 scale. However, it could be many years before all lenders shift to the new system, and it remains important to differentiate between the two providers.
The Privileges of Excellent Credit
It's not easy to build an excellent credit score, and few would bother were the rewards not rich. But they are. Here are the four most important privileges:
- Lower interest rates: Someone with fair credit can easily pay $200,000 more in interest during a lifetime of borrowing than someone with a good score -- even if the two borrow precisely the same amounts at the same times. And that's just for a standard, middle-class lifestyle.
- Access to borrowing: It's unlikely that the most creditworthy are going to be refused a loan, so they're free to buy their homes, cars and other goods at the times that suit them best, including when market conditions are providing bargains.
- Freebies: When it comes to credit cards, the most valuable rewards, perks and privileges tend to be offered by cards that are available only to those with excellent scores.
- Peace of mind: Nobody enjoys the humiliation of having an application for an account turned down, something that's unlikely to happen to those in this group.
Keeping Excellent Credit
In any ranking of questions, "What is excellent credit?" falls way below "How does one keep it?" For most, the tough part is in building the score, and keeping it just involves following the same rules. One should:
- Actively monitor one's credit score and report, and get any errors in the latter corrected quickly. Unlike when a report is accessed by a lender as part of a credit application, checking one's own creditdoes not reduce one's score.
- Pay every bill on time.
- Keep the amount owed low. In particular, credit card balances should not exceed 30 percent of credit limits -- and 20 or 10 percent could squeeze a few more points onto a score. That applies to each individual card, and when the balances and limits are totted up and viewed together. This means closing old card accounts should be approached with care because it reduces the combined total of one's credit limits.
- Not apply for too many new accounts in a short period. This doesn't prevent borrowers from getting different quotes for mortgages and so on, because FICO and VantageScore design their systems to allow comparison shopping exercises, provided they're carried out over a short time.
- Maintain a mix of accounts that includes installment loans (mortgages, auto loans and others with fixed end dates) and revolving credit lines, such as credit cards.
Anyone who has achieved an excellent credit score should congratulate himself, and enjoy all the advantages one brings. The last thing he wants is to see it drop.