Except when you're playing golf, a higher score is normally better than a lower one. That's the case with your credit score. As you improve it, you'll get lots of benefits, including access to better credit cards and lower interest rates on loans. In most states, it can even help you save on car insurance.
So a high credit score is a good thing -- no argument there. There are still some drawbacks, though, and many people don't know about them. If you have a high score, or you're working on getting one, watch out for these potential issues.
1. You'll have more borrowing power, which could lead to spending more
When you apply for a loan or credit card, the lender checks your credit. It's not the only factor that matters. Your income, in particular, is also important. But a high credit score allows you to borrow more money.
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I still remember when I applied for my first rewards credit card at 21. Until then, I'd only had a basic, no-frills card with a $500 limit -- the kind of limit card issuers give to someone they're not too sure about yet. I was stunned when I got approved for a $9,000 limit this time around. I was making $30,000 a year back then, so my credit limit was nearly a third of my annual income.
Luckily, I'd heard enough horror stories to know that having a $9,000 limit didn't mean I should go out and spend $9,000. But I could've done it and put myself in a difficult situation. If you have a high credit score, you could, too.
Don't take this as an invitation to spend more. Credit cards have high interest rates, so credit card debt is expensive even with a high credit score. Only spend what you can afford to pay in full.
2. Your credit score will drop more if you do anything wrong
Credit scores follow the old adage of "the bigger they are, the harder they fall." The higher your score is, the more damage it will take for any missteps.
To give you an example, we can look at info provided by FICO. Its FICO® Score is the most widely used scoring system by lenders. It showed how different actions would affect the credit scores of several hypothetical people in its "Changing the Score" infographic.
Here's the kind of damage missing a payment by 30 days would do:
- If the person has a spotless credit history and a 793 credit score, their score would drop by 63 points to 83 points.
- If the person has problems on their credit history and a 607 credit score, their score would drop by 17 points to 37 points.
To maintain a high credit score, you need to maintain an excellent credit history. Any negative items, including missing payments and maxing out all your credit cards, can lead to a serious drop in your score.
3. You eventually stop benefiting from raising your credit score
Several types of credit scores exist, but the most commonly used go from 300 to 850. An 850 is considered a perfect score, and it's rare. Only 1.31% of Americans with a FICO® Score have an 850, according to credit score research by The Motley Fool Ascent.
Now, I did say that higher credit scores are better earlier -- but only up to a certain point. That point is a FICO® Score of 760. You don't need to work toward that elusive 850, or even an 800.
While lenders look at your credit score, what they're really looking at is your credit score range. The highest range, according to MyFICO's loan savings calculator, is 760 to 850. At that point, you can qualify for the lowest mortgage rates. It doesn't matter if you have a 780 or a 770.
Once you're in that range, you don't need to worry about building your credit score anymore. It's smart to maintain your credit score and avoid doing anything that will lower it if you're about to apply for a loan. But you're not going to benefit from a higher score.
How to get a high credit score
Even with those drawbacks, a high credit score is still well worth it. If you don't have one yet, there are only a couple of credit-building habits to follow.
The most important is to always pay your bills on time. Payments that are 30 days late or more can be reported on your credit history and do a number on your credit. Make sure you also have at least one credit card that you use and pay off every month. On-time credit card and loan payments have a positive impact on your credit.
Also, avoid overspending on your credit cards. You'll stay out of debt, and this is also good for your credit utilization (your credit card balances compared to your credit limits). A popular guideline is to keep your credit utilization under 30%. For example, if you have a $10,000 credit limit, keep the balance under $3,000.
Those are the biggest factors in your credit score, and the only ones I focus on. If you always pay on time and don't overspend, you'll be able to build and maintain excellent credit.
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