Perfection does not exist except when it comes to your credit rating. There, we have a precise figure for perfection: 850. Pretty high, right? This is when you consider that the average FICO score in the United States is 711, while the average VantageScore is 688.. And yet, you hear it all the time in the world of personal finance, student loans, and real estate. It’s like a provocative mantra: “You must have perfect credit… You must have perfect credit…” But how important is a perfect credit score? Is it worth it to build our financial life around us?
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In short, the answer is no. Having a perfect credit score is overrated, so you might as well stop aiming for that massive 850 number, which for the most part is unattainable.
Experts consider a score above 780 to be excellent
“The two main reasons that a perfect credit score is overrated is that reaching the 850 level offers little benefit to the individual, and attempting to take advantage of it causes you to fall off the perch, ”said Kevin Haney, president of Growing family benefits and previously a executive with Experian. “A score of 850 has no advantage over someone at level 800 – 50 points lower. Experts consider a credit score above 780 to be excellent. Most consumers with ratings in this range get the best loan terms (lowest interest rates) and cheapest insurance premiums (auto and homeowner).
In other words, most lenders and insurance companies don’t significantly differentiate offers to people with great scores – the top 20%.
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Most lenders are cool with a “good” score of 700 and above
“In many cases, having a good credit score (700+) will reap the same benefits as having a perfect credit score, including securing low loan rates and larger loan amounts,” said Kalicia Bateman, Mortgage Specialist at Best company. “Yes, you can get even lower rates on your mortgage or car loan with a credit score of 850, but the difference between that score and a score in the 700s is probably much smaller than you think. . “
Bateman pointed out that it’s more important to just have a credit score than to have a perfect score over 800. Without it, you won’t be able to borrow money, make major purchases, or show lenders how how responsible you are for your debts and payments on time.
“But, you don’t have to bend over backwards to get your credit score perfect,” Bateman said. “Your money could be used or invested more efficiently than spending more on a credit card or incurring unnecessary debt. “
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Once you take out a new loan, your credit ceases to be perfect anyway
If you can manage to achieve a perfect credit score of 850, keep in mind that your perfection may not last very long.
“If a person with a score of 850 takes out a new loan, they immediately cease to be perfect,” Haney said. “First of all, a thorough investigation will drop their score approximately 5 points immediately to the bureau providing the credit report used by the lender. Then the additional account reported by the lender will affect two sub-factors in the three branches:
The average length of the story will be shorter.
New credit activity will be higher.
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The algorithm for determining perfect credit is obsolete
“An outdated algorithm is used to calculate credit scores,” said Cameron Miller, a real estate expert. “These are not very good indicators of a person’s level of risk. If you make a mistake at 18, you will have to pay it at 25. Getting a new line of credit will hurt you more than it will help you. One late payment will leave a permanent stain on your file. It is far too difficult for young people to get credit. It is by no means a perfect system. It has flaws and is unfair.”
Some lenders will work with a much lower score
The main reason we tend to obsess over having perfect credit comes from a smart place – we want to be as eligible as possible for loans. And while it’s true that a perfect credit score can better help you get the maximum loan, a lower score won’t hinder your path to lenders – it will likely only increase your interest rate.
“Not all lenders charge the same interest rate, and they don’t all lend to the same borrowers,” said Kunal Sawhney, CEO of Kalkine Group. “Many lenders lend to borrowers with a FICO score below 670. This is because not all borrowers with a great credit score have a timely repayment guarantee, and all borrowers with a bad credit score. score do not benefit from a guarantee of defect.
“This is because borrowing becomes a bit more expensive when the credit rating is in the fair or bad categories,” Sawhney continued. “At times like this, assess your debt-to-income ratio and see if you can comfortably pay off the debt at a higher rate. Interest rates have no fixed rationale, and they are shaped by multiple forces such as the rate of economic growth and inflation. Today, as the government embarks on a multibillion-dollar stimulus package and the Fed has kept benchmark rates near zero, lenders will be prepared to lend at lower interest rates. very high, even to those with bad credit. Goal.”
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The pursuit of perfect credit can be costly in other ways
Going for perfect credit seems like a smart financial pursuit, but it can be more difficult than it’s worth – and costly for your overall well-being.
“The search for a perfect credit score is problematic because there is no financial flexibility,” said Kalleigh MacCormack, personal finance expert and editor of Genius credit card. “More, [it] may feel limiting and exhausting, which could have an emotional impact on you however, if you have a good credit score (above 750) there is no need to stress to improve it, as it is just extra pressure to hit 850.
And as the saying goes, none of us are perfect, and we should let that maxim apply to our financial stature as well. Just like the humans who hold them, credit scores can have flaws and do very well.
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Last updated: July 19, 2021
This article originally appeared on GOBankingRates.com: Why Having a Perfect Credit Score is Overvalued