Credit scores are calculated using different models from different credit reporting agencies. While the exact algorithms are proprietary, we know that a perfect score is usually 850 points, and the biggest factors affecting your credit score are your payment history and your “credit utilization” — how much of your available credit you’re using at any given time. These two factors together account for around 70% of your credit score.
The remaining third is a combination of the age of your credit history and your “credit mix.” Potential lenders like to see that you’ve had accounts open for several years and used them responsibly, and that you can successfully manage different types of credit: for example, a combination of credit cards, student loans, and a home loan.
As someone who spends a lot of time thinking and writing about money, and who has almost 30 credit cards, you’d think a perfect credit score would be my dream. But it’s not, and here’s why. Striving for a perfect score can incentivize bad financial decisions
If you’re aiming for a perfect credit score, you might look at the list of factors that affect your score and think “Oh, I could do some things to change this!” For example, some people try to improve their
But loans aren’t free — and unless you’re buying a car, home, or other major asset, you’re going to have to put down your own cash to borrow against. That means you aren’t gaining any financial flexibility, you’re just paying for the privilege of borrowing your own money. Unless your credit history is nonexistent, it’s probably not worth the cost for a minor bump in your credit score. Artificially making your credit history longer puts your score at the mercy of someone else
Another common credit improvement technique is adding yourself as an “authorized user” or responsible party on someone else’s older credit line, since that will increase the average age of the credit lines on your report. This can be a double edged sword, though — if that person misses a payment or uses too high a percentage of their credit in a given month, that will also be reflected on your credit history, and could actually make your score take a serious nose dive. You can get a lot more value from signing up for new credit cards than from having a perfect credit score
One of the biggest pieces of advice that you’ll hear from
In fact, over time having more accounts will likely increase your score, since you’ll be using a smaller percentage of the overall credit available to you — that’s why it’s possible to have 26 or more credit cards and still maintain a credit score in the 800s. And in the meantime, you can reap the rewards of credit card welcome offers, which are generally worth far more than a perfect credit score, as long as you’re paying off your bills every month.
One important exception to this: If you’re planning to apply for a mortgage or other large loan in the near future, you may want to hold off on the credit card applications for a bit. While it’s far from impossible to get a good rate on a mortgage even with a lot of recent activity on your credit report, it can be a red flag for lenders and lead to a lot of additional paperwork and questions.
This is the main reason why I never want to have a perfect credit score: The travel rewards I can earn are way more valuable to me than a perfect score. And while I wouldn’t necessarily want to apply for a mortgage right now, if I stop getting new cards for around a year, my score should jump enough to qualify me for the lowest mortgage interest rates. In practice, there’s not really a difference between a great score and a perfect one
Lenders don’t expect anyone to have a perfect credit score — anything above 740 is considered “very good” and anything above 800 is considered “excellent”. If you have a score in this range, that tells lenders you have a less than 2% chance of failing to make payments on time. Even a “good” score between 640 and 739 is a very strong sign to lenders, since only 8% of people in this score range go late on
Lenders often don’t care about the difference between a very good score and a perfect one, so there’s no reason to stress out about it. Just make sure you’re doing everything necessary to keep your financial house in order, and spend your time focusing on other things … like how to spend the points you earn from a new credit card bonus!