Financial experts usually emphasize the significance of having the highest credit score possible since it plays an essential role in finance. Conversely, people with low credit scores are frequently denied access to standard lending options and, in some situations, do not even have insurance or any other sort of professional money-related services. To correctly analyze the significance of maintaining a healthy credit score, we must first define it and examine the factors that influence it.
Credit Score: Definition
A credit score is a digital expression of your previous payment history used by other parties, particularly lenders, to determine the risk of your payability. The scoring is one way for banks, and other financial organizations to determine whether or not you can or will be able to pay off any obligations you accrue. A better credit rating suggests that your present financial situation and past conduct reflect a willingness and capacity to repay any loans you may be accepted for.
Most scoring models in the United States are generated by FICO (Fair Isaac Corp.) or VantageScore Solutions.
FICO is the most commonly used corporation, created by an analytics firm in 1956 by an engineer, and Earl Isaac, a mathematician.
VantageScore Solutions was created by Equifax, TransUnion, and Experian in Connecticut in 2006.
While there are numerous resemblances between FICO Ratings and VantageScore, some significant differences also exist. Though these two scoring models have the same range of 300 to 850 for credit ratings, the notion of a good score varies.
The charts below will answer the borrowers’ frequently asked question “how high do credit scores go”.
The Main Factors Affecting The Credit Score
Credit scores are calculated based on the five primary elements:
- Payment history
- Amounts owed
- Length of credit history
- New loan
- Loan mix
Payment history: As you see from the pie chart, the lion’s share in the formation of your credit portfolio belongs to the payment history. So, the borrowers should properly evaluate the significance of making on-time payments and work hard towards maintaining the payment history in good standing.
Amounts owned: The next key factor in generating your three-digit number is the amount owned or loan utilization. The latter examines how much of your available credit you're using and might provide a glimpse of your reliance on non-cash finances.
Length of credit history: The length of your credit history is also essential. The borrowers should keep their old accounts active for as long as possible.
New loan: Though it cannot be compared to the previous two elements, the new loan also impacts your credit rating. Too many accounts or queries to obtain a new loan may indicate increased risk.
Loan mix: Scoring algorithms analyze the sorts of accounts you have and the number of each as indicators of how well you handle various lending products.
Your financial profile is subject to change over time. Thus, the borrowers should strive hard towards keeping a perfect credit score, as the latter can assist them in getting loans with the best possible terms.
What Is the Max Credit Score & How to Get It?
If you wonder “what is the highest credit score?” or “what is the highest fico score?” a borrower can have, we are here to say that, the highest possible Fico rating is 850. While a perfect 850 is theoretically feasible, statistically, it is unlikely to occur. In reality, only around 1% of people will ever see an 850, and even if they do, they won't see it for long since bureaus regularly change them. Here is a handful of tips to reach the top score:
- Pay on time
- Maintain a low loan use rate
- Don’t request loans frequently
- Often review the reports of your financial history
While there is no assurance that you will attain perfection, you may be able to increase your three-digit number.
The Advantages of Having a High Score
Having a top credit score will save you money and simplify your financial life. Here are some of the significant advantages of the highest credit rating.
Thus, with a strong portfolio, you can get:
Higher Chances of Getting a Loan Approval
The highest points in your financial portfolio do not guarantee that you will get the loan; the lenders will also consider other factors embracing your income level and employment status. However, a good payment history may boost your chances of getting loan approval. Besides, borrowers with solid financial backgrounds may request any type of loan with confidence.
Low-Interest Rate Loans
The interest rates may be directly connected to your payment history. The higher your rating, the lower interest rates you may manage to get. The less interest you pay, the sooner you'll be able to pay off the debt, and the more money you'll have to add to your saving account. Remember that even a minor percentage difference may cost you thousands of dollars throughout the loan’s lifetime. Thus it’s worth your time and effort to shop around for the best interest rate available in the lending market and bargain.
As your rating, along with your income level, plays a crucial role in determining your creditworthiness, the lenders (banks, online lending companies) are ready to lend you higher amounts. The borrowers with poor payment history may still obtain some types of loans from online lenders; however, the borrowed amount will be restricted.
Better Insurance Rates
Insurance agencies use the data from your financial portfolio to build your insurance risk score. Accordingly, borrowers with bad marks in their payment history will get higher insurance rates. However, be aware that in some states (California, Hawaii, Massachusetts, and Michigan), the practice of offering cheaper insurance rates to borrowers with perfect scores is prohibited.
Approval for Renting Property
Many borrowers are unaware that it is essential to have high eligibility records even if they cannot purchase a home. The landlords evaluate the borrower’s credit rating when reviewing your rental application. A strong financial rating increases your chances of being approved as a renter since a history of on-time payment behavior is more appealing to a landlord than someone with many delinquencies. If you don't, you could have to pay a bigger deposit, sign a short-term lease, or possibly be turned down for accommodation entirely.
Approval for Specific Jobs
Be aware that employers must have a solid financial portfolio to apply for some sort of employment (particularly those involving money). It guarantees that you are financially capable or will not adhere to bribery whenever financial issues arise. Thus, despite your professionalism and solid experience, a high score is critical in obtaining the desired position.
The Bottom Line
Your score affects nearly every aspect of your financial life, from loan and mortgage applications to something as crucial as a lease on a new apartment. Therefore, the borrowers should concentrate their credit-building efforts on making on-time payments. These are the characteristics that impact your ratings most. Realizing the significance of having a high credit score can assist you in making it a reality. So, grab your chance, and start creating the highest credit score possible!