Back when I practiced bankruptcy law, no one ever thought they would end up in my office. Almost all of these folks were just like you and me — they had jobs and a source of income to support their budget, and were fairly stable financially. But something changed in their life.
Maybe a spouse lost a job, or they did. Or someone got sick and the medical bills piled up. Whatever it was, that sweet credit score they had so carefully built up went down the drain. Credit cards that were always manageable became unmanageable.
They needed a way out, and declaring bankruptcy was usually the answer. Yes, they would have preferred to pay their bills, but sometimes that just wasn’t possible.
(Law was a tough profession until I started my bankruptcy practice. Litigation clients never wrote me thank you notes, but my bankruptcy clients often did. Why? Because bankruptcy made their life easier. If you are in over your head, I am here to tell you that bankruptcy law can be a good solution, and it’s OK.)
The other piece of good news for these clients was that while their credit scores took a big hit, it actually didn’t take them that long to get it back up; maybe a year, two at most. And maybe even better, they didn’t need a stellar credit score to start living a good life again.
The fact is, you don’t need to have a perfect credit score to get the benefits of great credit.
Why you don’t need a perfect credit score
A perfect FICO® Score is 850. That said, while there are lots of benefits to having a great credit score, you don’t have to hit that perfect 850 credit score to start enjoying them.
What are those great benefits? They are numerous, including:
- Best interest rates on credit cards, mortgages, etc.
- Lower insurance rates
- Much better options for certain jobs
Generally speaking, you can get most of these benefits with a credit score of 740 or above. If you really want to get the very best rates, then shooting for a score of 800 (as opposed to 850) will work just as well. This is because FICO takes ranges of scores into account. Here are the FICO® Score ranges:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very Good: 740-799
- Exceptional: 800-850
So, as you can see, 800 is not a lot different than 850. Both are “Exceptional.” And beyond that, 800 is not even dramatically different from the next level below, the “Very Good” range of 740-799.
Indeed, once you hit the “Very Good” range, you will qualify for almost all of the same perks as someone with a perfect 850 score. This includes access to low interest rates, the best credit card offers, and favorable terms on mortgages and auto loans.
The diminishing returns of a perfect 850 credit score
The fact is, the quest for a perfect 850 score can often lead to diminishing returns for several reasons. First, maintaining that 850 score is not easy; it usually requires meticulous attention to every aspect of your finances and credit report. Even a minor issue, like a slightly higher credit card balance or a single late payment, can drop your score.
In addition, most lenders do not treat an 800 score much differently than an 850 score. Once you cross the 800 threshold, you will most likely be offered the very best rates and terms available. Additional efforts to reach 850 therefore will not make much difference (except that they will take up your precious time without yielding precious results).
Raising your credit score
As I mentioned when discussing my old bankruptcy clients, raising your credit score is not that difficult and you can actually see results fairly quickly. Focus on the following:
- Pay your bills on time.
- Use credit cards and then pay them down, or better, pay them off each month.
- Keep other outstanding balances low.
So, while it might seem like getting that perfect 850 could be a smart idea, it very likely is not worth the effort. Create and maintain good financial and credit habits and don’t worry about being perfect. FICO will notice your good habits and score you appropriately.
