It’s been drilled in our heads for the last 36 months: “lender’s standards are going higher, while our FICO scores are headed lower.”
This divergence in underwriting standards and scores is bad news for a whole lot of people, roughly 70,000,000, who now score below 650. And those of you who are smart have made some effort to increase your scores so you can enjoy the most “shopper friendly” credit environment in 20 years.
If you’ve already found yourself in the land of the 780s, it’s time to take your foot off the accelerator because you’re good — really good. Any further efforts have you officially beating a dead horse and attempts to take the magic number any higher could land you back in the land of the 720s.
Here’s what you need to hear (though you may not want to):
There is no incremental value to being higher than 780
Other than bragging rights, there’s really no reason to stress out about your scores if they’re already over 780. Even in today’s credit environment a 780 puts you about 20 points to good and you’ve now found yourself squarely among the credit elite. You will likely get whatever you’re applying for at the best rates and terms the lender or insurance company has to offer.
As of September 2010, a 780 FICO score gets you a credit card at 7.9% (issued by a credit union). It also gets you auto financing from a captive lender (the manufacturer’s finance arm) for as low as 0% on selected models. And even if captive financing isn’t an option for you, a 780 gets you rates as low as 5.2% for a new car. And if you’re trying to buy a home, a 780 (along with satisfying other non-credit criteria) gets you a rate around 4%, which is crazy low.
The point is, your rates, premiums and terms will be no better at FICO 810, 830 or 850 than they are at 780.
You can do more harm than good
If I’ve said it once I’ve said it 1000 times…credit scores move like water. They’re going to take the path of least resistance. That means a score of 780 is easier to turn into a 680 than it is to turn it into an 800.
This is especially true for people with young (age) or thin (number of accounts) credit files. The good people at Mint.com have told me that many of their MintLife readers are in their 20s. And if you look at the comments to my student loan debt story, I kind of get that same idea.
Something that you won’t see from reading online stories about credit scoring models is the fact that young people generally have younger credit reports (duh). That’s determined by calculating the average age of the accounts on your credit reports by looking at the “date opened” of your accounts. And the younger the credit file the more volatile the score. In English this means your scores are going to react to changes in your credit data more significantly than someone who has had credit for decades. So this story is especially meaningful to Mint readers because of their age and their younger credit files.
If you apply for and open a new account, apply for a credit line increase, max out a credit card, miss a payment, have a collection show up on your credit report, or experience a variety of other credit incidents, your scores are likely to be damaged disproportionately to someone who has a well-aged credit report. This is because you don’t have as much positive compensatory information to offset the bad stuff.
Yes, your scores can actually be too high
Some lenders don’t want an abundance of customers whose scores are too high. Stratospheric scores, those well into the 800s, generally belong to people who don’t use credit. And those who don’t use credit don’t generate income.
For the first time ever there’s now a sweet spot, credit score wise. You really want to fall between 760 and 810, give or take a few points in either direction. The 760 means you’re a very good credit risk. It also means you’re probably using credit, have credit card balances, and have installment loans. This means you’re generating revenue for your lenders and credit card issuers.
If you score too high it means you are probably not using credit cards. You’re a very good credit risk but that’s not good enough in today’s credit environment. The lender wants and needs to make some dough and if your score indicates that you’re a great credit risk but have poor revenue potential then they might just decline you. Yes, you can get declined for having too high of a score. It’s called a “high side override”, meaning you scored higher than the lender’s low-end criteria but they still declined you.
So for those of you who are at 760-780, your journey has ended. Sit back and enjoy the view from atop the FICO score mountain!!
For The Haters
Save it. This isn’t score obsession. As long as lenders, insurance companies, utility companies and landlords use credit scoring to determine rates, premiums, deposit requirements and terms (and employers use credit reports as part of employment screening) it’s something we have to take seriously, and you should regularly check your free credit report to keep tabs on your financial health.
You can’t “choose” to not be under the influence of your credit reports and credit scores. That’s not possible. Having good credit reports and scores, and paying less for things (your mortgage, your car loan and your insurance) is a “Top 5” wealth building tool. Trying to earn a great FICO score is no different than checking the performance and allocation of your investments. The minute credit reports and credit scores cease to have importance, I promise I’ll start writing a weekly knitting column.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.