In today’s financial landscape, there’s no shortage of advice on the importance of maintaining a stellar credit score.
Whether you’re aiming to secure a favorable mortgage rate or snagging a lower interest rate on a car loan, the common wisdom is that your credit score is the key to unlocking these financial perks. But is it possible to overdo it when it comes to chasing that elusive perfect credit score?
Personal finance guru Clark Howard offers a refreshing, no-nonsense perspective on this issue. His take? Americans who obsess over achieving an 800 or higher credit score are, in his words, “crazy.” According to Howard, once you’ve hit a credit score of 760, you’ve already unlocked all the benefits that come with an excellent credit score, and there’s no need to push for perfection. He argues that the incremental benefits of pushing your score beyond 760 simply aren’t worth the extra effort and potential stress.
The Mechanics of Credit Scores
To understand why Howard’s advice holds weight, it’s essential to grasp the fundamentals of how credit scores work. A credit score is a numerical representation of your creditworthiness, reflecting how likely you are to repay borrowed money based on your past behavior. The most widely used credit scoring model, FICO, ranges from 300 to 850. This score is calculated based on several factors, each contributing differently to your overall score.
Payment History: This is the most significant component, making up about 35% of your FICO score. It reflects your ability to make on-time payments on your credit cards, loans, and other debts. Missed payments, defaults, or bankruptcies can severely damage this aspect of your score.
Credit Utilization: This factor accounts for about 30% of your score and measures how much of your available credit you’re using. Financial experts recommend keeping your credit utilization below 30% to maintain a healthy score. High utilization can signal to lenders that you’re overextended financially, even if you make all your payments on time.
Length of Credit History: This factor, contributing 15% to your score, takes into account how long your credit accounts have been active. A longer credit history provides more data on your financial behavior, which can positively impact your score. This includes the age of your oldest account, the age of your newest account, and the average age of all your accounts.
Types of Credit: The variety of credit accounts you manage, such as credit cards, mortgages, and installment loans, makes up 10% of your score. A diverse credit mix indicates that you can handle different types of credit responsibly.
New Credit: This final 10% reflects how often you’ve applied for new credit recently. Opening too many new accounts or having multiple credit inquiries in a short period can be viewed as risky behavior and might lower your score.
Striking the Balance
For those striving to boost their credit scores, reaching that 760 mark is more realistic and beneficial than obsessing over an 800 or higher score. Howard emphasizes that once you’re in the “golden range” of 760, you’ve already qualified for the best loans and interest rates available. There’s no need to stretch your finances thin or manipulate your score further.
If you’re still working toward that 760 benchmark, there are practical steps you can take. Start by reducing the balances on your credit cards to lower your credit utilization ratio. This move can have a significant positive impact on your score. Payment history is the most critical factor, so ensure you’re paying your bills on time every month.
Keeping your credit utilization below 30% of your total credit limit is another crucial step. Aim to pay off your credit card balances in full each month to maintain this healthy ratio. Also, keep your old accounts open, even if you don’t use them frequently. The length of your credit history matters, and closing old accounts can shorten that history.
Be cautious about applying for new credit too often. Multiple hard inquiries in a short time can temporarily dent your score. It’s also wise to regularly review your credit reports from all three major bureaus—Equifax, Experian, and TransUnion—to catch any errors or inaccuracies. In 2023 alone, over 443,000 Americans filed complaints about errors in their credit reports. Disputing and correcting these mistakes can boost your score.
Finally, consider asking a family member with a strong credit history to add you as an authorized user on their credit card account. This can enhance your credit score without you needing to use the card, as their positive payment history will reflect on your credit report.
The Bottom Line
In the quest for financial well-being, it’s easy to get caught up in the numbers game of credit scores. However, Clark Howard’s advice serves as a reminder that there’s a point of diminishing returns. Once you’ve hit a credit score of 760, you’ve done enough. Instead of obsessing over a perfect score, focus on maintaining healthy financial habits that will keep you in that golden range—without the stress.
