I just got my Discover Card bill in the mail. Ugh… another bill, right? I only use my Discover card for gas, this bill usually doesn’t sting. The fun part of opening my Discover Card bill each month – yes, there is a fun part – is getting to see my FICO score since they include it on my monthly statement. My FICO score is: 850! What’s the highest possible FICO score? Yup, you guessed it: 850.
Can you really have a perfect FICO score? Yes; I am living proof. My FICO score has been 850 for a few years now. Boasting about your perfect FICO score isn’t something that will make you popular at parties. It probably won’t help get you a lot of dates either, but it could help you get better terms on a mortgage, a car loan, insurance rates, etc.
A Perfect Score
An 850 score is a perfect FICO score. But perfection isn’t all it’s cracked up to be. You don’t need a perfect score to get excellent lending terms. Lenders don’t care if you have a perfect FICO score. They just want you to have an excellent FICO score; a score above 760. Anthony Sprauve, director of public relations at FICO, told Forbes, “It’s important to understand that if you have a FICO score above 760, you’re going to be getting the best rates and opportunities.” So my perfect FICO score isn’t really that important. What is important is having a very good FICO score; a score above 760. If you have a FICO score of 760 or above, congratulations; if you don’t, you should strive to reach 760.
One of the primary components of your FICO score is your Credit Utilization Ratio. This ratio represents how much of your available credit you actually use. If you are borrowing $1,000 on your credit card and the maximum amount that you can borrow on your credit card is $10,000, then your Credit Utilization Ratio is 10%. If you borrow $8,000 of the $10,000 available credit, then your ratio is 80%.
The lower the ratio, the better
The lower the ratio, the better it is for your FICO score. MyFICO, the website of the Fair Issac Corporation, indicates that 30% of your FICO score is determined by your Credit Utilization Ratio. Since 30% of your FICO score is determined by this ratio, you should try to keep it as low as possible. (“FICO” is derived from the name of the credit reporting agency, “Fair Issac Corporation;” a bit of trivia sure to make you a hit at parties.)
Maintaining a low Credit Utilization Ratio will improve your FICO score. There are other ways to improve your credit score. The easiest way is to pay your bills on time. Don’t be late with payments. Late payments could damage your credit score for many years. I’m not suggesting that you must pay your balance in full; you just need to pay the minimum balance on every bill on time. It’s incredibly easy to pay bills on time. Just set up an automatic payment each month. How much should that payment be? Schedule an amount that will likely cover the minimum amount due. This will ensure that you will make a monthly payment. Before each payment is due, you can, and should, adjust that payment amount to pay more than the minimum. Ideally you would pay off the entire outstanding balance. By having that automatic payment set up to cover the minimum payment, you can ensure that you will never pay your bill late.
Improve your credit score
You can also improve your credit score by disputing errors. An FTC report from 2013 indicated that 25% of consumers identified errors on their credit reports which might affect their credit scores. Periodically check your credit report. If you notice anything out of the ordinary, dispute it.
All consumers are eligible to receive a free credit once each year from annualcreditreport.com. The FTC indicates that this is the only website that is authorized to provide consumers with their credit report. Once each year, go to annualcreditreport.com. Get your credit report. Review it for errors. If you see anything out of the ordinary, dispute it. The most common errors are identity errors, incorrect account details, and fraudulent accounts.
Check for errors and fraud
Identity errors might be benign, like an incorrect address. Account detail errors might be minor as well. They could be anything from displaying wrong credit limits to listing accounts as active which should be listed as closed. For instance, you may have completely paid off a car loan, but it’s still listed as open. Simply contact the credit agency to correct these errors. Remember, errors can negatively impact your credit score.
The most serious issues are fraudulent accounts and fraudulent activity on active accounts. If you see anything like this, act immediately. You might need to place a temporary security freeze on your account. This will inhibit anyone, including you, from opening any new lines of credit.
It’s pretty easy to improve your credit score. Every month, pay your bills on time. Ideally, pay off any outstanding balance. Be mindful of your Credit Utilization Ratio. Try to keep your ratio below 30%. Periodically check your credit reports for errors. And if you see something, say something; report it immediately.
While I enjoy seeing that 850 on my Discover statement every month; perfection is overrated. You don’t need a perfect FICO score. Anything above 760 is excellent. Lenders will likely provide those with excellent FICO scores with superior lending terms.