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Your credit score is one of the most important numbers in your financial life. If it is high enough, it can be your passport to better opportunities in many regards. A good credit score allows you to buy a car, home, and enjoy lower prices on auto, renters, and homeowner’s insurance and many services and utilities. But how high does your credit score need to be?
Understanding credit scores
Credit scores range from 150 to 950, but vary a bit depending on the calculation used and the bureau that calculates the score. The lower the score, the worse it is, with 300 the worst and 850 considered a “perfect” score. You don’t need a perfect credit score to enjoy the benefits of higher scores, but you need something more impressive than 300.
In recent reports, the average American credit score hit an all-time high of 704. It is excellent news, and if yours is there, you’re doing well. As for a perfect 850 credit score, only about 1% of people ever achieve it. You don’t need a score that high to feel the benefits, though.
Subprime vs. super-prime
You might have heard talk of subprime loans. These finance arrangements are for people with lower credit scores. A subprime loan is high-interest, above the “prime rate”--thus the name. People with middling to poor credit scores qualify for these loans.
If you have a score of 550-620, you will likely only qualify for subprime financing. That means you’ll pay much more in interest. Super-prime is the opposite. It’s when you have good credit and can get the best credit offers for cards and loans.
Super-prime credit is 740 and higher. These consumers can get the best deals on interest rates on credit cards, loans, and more with interest rates at lower than the prime rate. A score of 680-739 is considered a prime borrower.
If you don’t know, the prime rate is the interest rate banks charge their very best customers. Right now, it averages about 1.75-2%. That’s a pretty sweet deal and can save you lots of money on interest if you qualify.
Looking beyond credit scores
While you will usually get better interest rates with a better credit score, other factors matter for loans like a mortgage or vehicle financing arrangement. Lenders consider other factors including your income and employment history plus whether you’re likely to retain the job you now have. They may contact your employer to discuss your employability odds.
You can have a great credit score, but if your income demonstrates you can’t afford the loan payments, you shouldn’t be approved. But if you’ve got a steady income, good employment history, and a reasonably good credit score, you should still be able to get reasonable financing offers at affordable interest rates – even without perfect credit.
How low is too low?
Credit scores below 650 can be problematic. With a subprime score like that, you’ll struggle to get approvals for financing or credit. And for offers you do get, the interest rates will be higher or demand a down payment (on a vehicle or mortgage) may be steeper. For example, a super-prime borrower can get a car loan for 2.6% interest (or less).
By comparison, rates climb to an average of 10.56% for subprime borrowers on the same car loan, according to Bankrate(dot)com.
The simple takeaway is that you should do all you can to get (and keep) your credit scores as high as you can. But once you’re past 740, it is probably not worth the effort to push yourself up to 800. So long as you make your payments on time and keep your balances low, you’ll have done plenty towards ensuring you have a better financial future.
To find out more about improving your credit score, check out our Credit Score Keys DVD.
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