Randy had an 850 credit score. According to FICO, the most popular grading model, that’s as good as it gets.
However, a line on his credit report said he could lower his occupancy rate, so he immediately paid off the rest of his car loan with a $6,000 payment, and then his score dropped 30 points. (Randy was the target of identity theft and was asked to omit his last name for privacy reasons.)
Most people assume that deleting these automatic payments couldn’t hurt, but that’s a mistake.
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When it comes to credit scores, there are a few things many borrowers often get wrong, experts say. Here are the most common misconceptions and why it’s so hard to break the record.
Misconception #1: Debt is bad
Your credit score — the three-digit number that determines the interest rate you pay on credit cards, car loans, and mortgages — is based on a number of factors, but most importantly, it’s a measure of how much you’re borrowing and how responsible you are when it comes to borrowing about payments.
An excellent score doesn’t mean you’re out of debt, just a proven track record of managing a mix of outstanding loans. According to a recent LendingTree analysis of 100,000 credit reports, the highest-scoring consumers owe an average of $150,270, including mortgages.
Borrowers with a credit score of 800 or higher, like Randy, pay their bills on time every time, LendingTree found.
To that end, Randy benefited from having a four-year car loan.
“Lenders also want to see that you’ve been in charge for a long time,” said Matt Schulz, LendingTree’s chief credit analyst.
The length of your credit history is another important factor in determining a credit score, as it gives lenders better insight into your background when it comes to repayments.
Misconception #2: All debt is the same
Since Randy had already paid off his mortgage and had no college debt, this car loan was key to showcasing a diversified mix of accounts.
“Your credit mix should include more than just having multiple credit cards,” Schulz said. “The ideal loan mix is a mix of installment loans, such as auto loans, student loans, and home loans, with revolving credit, such as bank credit cards.”
“The more different types of credit you can demonstrate to successfully handle, the better your score will be.”
The total amount of credit and loans you use compared to your total credit limit, also known as your utilization rate, is another important consideration for excellent credit.
As a general rule, it is important to keep revolving debt below 30% of available credit to limit the impact that high balances can have.
Misconception #3: You need a perfect score
According to the latest statistics from FICO, only about 1.6% of the 232 million US consumers with a credit score have a perfect 850.
Aside from bragging about it, you won’t get much benefit from being in this elite group.
“Typically, lenders do not require individuals to have the highest possible credit rating in order to secure the best credit characteristics,” said Tom Quinn, vice president of FICO Scores. “Instead, they set a high-end cutoff, typically in the upper 700s, with applicants above that cutoff qualifying as having good credit and receiving the most favorable terms.”
Each lender sets their own credit score thresholds that they consider to be the most creditworthy. As long as you fall within these ranges, you’re likely to be approved for a loan and qualify for the best interest rates the issuer has to offer, Schulz added.
“Anything over 800 is gravy,” Schulz said, and “in some cases, the difference between 760 and 800 may not be that significant.”
Most credit card issuers now offer their cardholders free credit score access, making it easier than ever to check and monitor your score.
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