How high does your credit score really need to be?

How high does your credit score really need to be?
Your credit score is a key factor in determining whether you can get a low interest rate on a variety of purchases. Jirapong Manustrong/Shutterstock.com
Your credit score is a key factor in determining whether you can get a low interest rate on a variety of purchases. Jirapong Manustrong/Shutterstock.com

Your credit score is one of your most important money numbers, so it’s important to have a good one. But what does that mean? Should you aim for a perfect score or is there a lower number that’s good enough?

Around 1% of Americans have achieved that elusive goal of earning a perfect 850 credit score on the FICO scale, and those with the highest scores can usually get the best loan rates as well as access to exclusive credit cards especially if they have high incomes to go along with their stellar credit.

But achieving a perfect score is hard because FICO and other credit-scoring formulas are secret and can be affected by things outside your control, like the age of your credit. The good news: While it may be an ego boost to have a top score, the truth is you don’t really need a “perfect” one.

Here’s what you need to know about how high your credit score should be to get the lowest loan rates and the highest chance of approval for everything from a rental apartment to an elite credit card.

Getting a mortgage

Hoping to buy a home? A good credit score can literally save you tens of thousands of dollars interest, because loan rates often depend on your credit score. In fact, your loan rate can be as much as 1.5% lower with a score of 740 or higher, Bankrate reported. Take out a 30-year, $300,000 mortgage, and that adds up to nearly $100,000 in savings.

Even if your credit isn’t perfect, you’ll have more loan options if your score is above 620. That’s because Fannie Mae and Freddie Mac, government-sponsored entities that buy mortgage loans from primary lenders, have guidelines in place to prohibit loans for borrowers with scores below that threshold. Since many banks resell their loans to Fannie and Freddie, it can be hard to get a conventional loan if your score is below this threshold.

If your score is lower than 620, you may want to consider a FHA loan issued through a private lender and insured by the Federal Housing Association. Targeted at low-income and first-time home buyers, FHA loans are available with down payments of as little as 3.5% and a credit score of as low as 500, which is otherwise considered “bad.” You’ll have to pony up a 10% down payment if your score is 579 or lower, however.

Taking out a personal loan

Banks, credit unions and other lenders all issue personal loans, which give you cash to do things like consolidate credit card debt or start a business. To get the very best rates, you’ll need a score above 750, GoBankingRates reported.

How much of a difference does a good credit score make? A lot more than you might realize. A score of 720 or higher can get you a 10.94% loan rate, versus 19.84% if you’re below 689, according to NerdWallet.

That can make a big difference in terms of your monthly payments. If you took out a $10,000 loan for five years, for example, you’d have to pay about $264 month with the higher interest loan, versus just $217 for the lower interest one.

And if your score is 579 or below, on the other hand, you’re unlikely to qualify for a personal loan at all.

Nabbing elite credit cards

A stellar credit score can also qualify you for credit cards packed with great perks. If you have a FICO score of 720 or greater, for example you’re considered a “super-prime” borrower by credit card lenders. That, in turn, boosts the odds you’ll get approved for elite cards like the Barclaycard Arrival Plus World Elite Mastercard, the Citi Simplicity Card and the Centurion Card from American Express.

A FICO score between 660 and 719 makes you a prime borrower, but your approval rates will still be relatively high and you should still be extended credit with favorable terms. Once your score drops below 659, however, you are considered a subprime borrower.

Subprime borrowers had around a 17.1% approval rate for general purpose credit cards in 2012, compared with a 58.7% approval rate for prime borrowers and an 85.5% approval rate for those with super prime credit scores.

Winning over the landlord to land a sweet apartment

When you’re in the market for a new pad, the landlord is going to check your credit to make sure you are good for the rent each month. To be able to get a lease in your own name, you’ll usually need a minimum credit score of at least 620, the San Francisco Chronicle reported.

If your score is below this threshold, landlords may consider you a high-risk tenant and demand a co-signer, guarantor or higher security deposit. References from past landlords and an explanation for your poor credit could help you to overcome obstacles if you’re renting with a bad credit score. But why put yourself at a disadvantage? Your best move is to keep your score high in the first place.

Scoring a car loan

In the market for a new car? Many car dealers claim to offer credit to anyone and everyone, but if your credit score is too low, you could end up with a sub-prime car loan or even get caught up in a scam.

For the lowest rates, it pays to get your credit score over 781, which classifies you as a “super prime” borrower, Bankrate reported. Whereas super prime borrows can get loans for as little as 2.6% and used car loans with average interest rates of 3.4%, for example, subprime borrowers with scores of 501 to 600 saw rates of 10.65% for new vehicles and 15.75% for used models.

How much can you save by being a super prime borrower? If you take out a five-year, $25,000 loan for a used car, you’ll save more than $4,200. In other words, it pays to have pristine credit.

Saving on auto insurance

If your credit score is low, you could find yourself facing higher auto insurance rates, according to NerdWallet. Drivers in all but three states had to pay more for car insurance if they had poor credit, with price differences reaching as high as $2,000 in some locales.

Scores above 740 are typically seen as the best risks for insurers, according to Car Insurance.com, while a credit score below 550 results in insurers giving you the lowest risk score and charging you the highest rates.

To avoid wasting money, get the lowest rates possible by keeping your credit score nice and high.

Getting hired

While employers can’t check your credit score, close to half of all companies responding to a 2012 survey checked job seekers’ credit reports, according to NerdWallet.

Some states restrict how your credit score data is used in the hiring process, but employers often have broad leeway to consider your credit history when making decisions about whether to hire you.

Good credit can help you get a job.
Good credit can help you get a job. Monkey Business Images/Shutterstock.com

Your employer must get your consent before checking your credit report, and employers are usually looking for serious problems that indicate untrustworthiness, according to Credit Karma. While a late payment or two likely won’t be a deal breaker, a history of defaulting on debt and getting court judgments against you could send up big red flags to a potential employer.

Oct. 4, 2017, 9:47 a.m.: This article has been updated.

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