Looking for a Better Mortgage Rate? Here’s How to Get the Perfect Credit Score

Many Americans are drowning in debt, particularly of the credit card variety. Households that don’t pay their cards off every month average over $16,000 in credit card debt. Your ability to repay your debts on time plays a major role in determining your credit score, also known as your FICO score. FICO scores range between 300 and 850, with the latter figure held up as the gold standard as it is the “perfect” credit score.

Your credit score takes the following into account:

  • Your capacity to make payments on time
  • The type of credit you have
  • The percentage of credit you utilize (i.e. how much of your available credit you use)
  • The length of time you’ve held your credit accounts
  • The number of new credit accounts you hold

Three major credit card bureaus calculate your credit score, and they don’t always have the same figure. For every consumer, the goal is to gain a ‘prime’ score that ensures you’re eligible for better rates on loans, especially mortgages. In general, a score of 681+ places you near the top bracket while people with scores under 620 struggle to get a competitive rate.

How Much Can I Save With a Great FICO Score?

When it comes to a home loan, it doesn’t matter the market; Dallas, Athens, Jacksonville, or Seattle, the difference between a FICO score of 620 and 770 typically equals tens of thousands of dollars over the life of the mortgage. Below, we look at a 30-year fixed mortgage worth $216,000 and outline your monthly interest rate and repayments according to your FICO score. Please note that these figures are NOT cut and dried, but they are representative of what you can expect.

  • 620-631: An interest rate of 5.16 percent and a monthly repayment of $1,180
  • 660-679: An interest rate of 4.18 percent and a monthly repayment of $1,054
  • 760+ An interest rate of 3.57 percent and a monthly repayment of $978

The difference between:

  • 620 and 660 is $76 a month or $27,360 over the life of the loan
  • 660 and 760 is $126 a month or $45,360 over the life of the loan
  • 620 and 760 is $198 a month or $71,280 over the life of the loan

Imagine what you could do with $71,280 in retirement. Keep reading to discover how you can boost your FICO score to the realms of perfection.

4 Ways to Reach a Perfect FICO Score

According to Fair Isaac Corp., only 1.4 percent of Americans have a perfect FICO score. In other words, there are more people eligible for Mensa. However, this percentage does equate to over 3 million people, so it is by no means impossible to achieve.

  1. Always Pay on Time

This is the golden rule of FICO score bumping because it shows lenders you are worth trusting when it comes to loans. The majority of lenders won’t allow more than one late payment every 12-24 months, and even then, you need to provide a reason for your tardiness. By the way, don’t believe the myth that you need to have a small balance on your cards. While lenders like it, credit bureaus usually don’t care. Make sure your balance is spread across several cards.

  1. Limit the Amount of Available Credit You Use

Don’t use more than 30 percent of the credit available on any one card and keep the level below 10 percent across all cards. In other words, if you have a $6,000 limit on a card, never owe more than $1,800 at any time. If you go above these limits, lenders may see it as a sign of poor money management. While you can ask for a higher limit, don’t increase your spending.

  1. Ensure You Have a Lengthy Credit History

Keep active cards open for as long as you can because this is a sign that you’re trustworthy. Having ten years of credit means you have a history of paying on time. In contrast, six months isn’t long enough for lenders to form conclusions regarding your creditworthiness. Resist the temptation to close long-standing accounts, even if you don’t use them often.

  1. Avoid Opening New Accounts when Possible

While it is a good idea to open a new line of credit with a better interest rate for major purchases like a car, don’t do it just to benefit from a small discount at a clothing store for example. Remember, new accounts reduce the average age of all your credit cards.

You can avoid the need for a new card by keeping a balanced spread of loans, including car loans, student loans, bank credit cards, department store cards, and of course, a mortgage.

Is It Worth the Trouble?

Generally speaking, all of the following must occur to achieve a FICO score of 850:

  • No credit inquiries within the last year
  • An active revolving card, preferably with a balance but not always essential
  • An active installment loan

In answer to the question, “Is it worth the trouble?” we have to say “yes and no.” A perfect score is not necessary in order to receive the best mortgage rates, as most lenders don’t distinguish between a score of 785 and 850. However, it is worth trying to get your score as close to 850 as possible to cushion you against any event that causes your score to tumble.

For the record, you are a very dependable borrower if your score is 740+ and an exceptional one if your score is 800+. You can’t achieve a perfect score for at least seven years if you have negative information on your credit report because that’s how long it takes for data to be stricken from the record.

However, a score in the high 700s and even the low 800s is achievable for most Americans. We recommend focusing on a score above 810 because you’ll remain cushioned against any events that cause the score to drop significantly. For instance, maxing out a credit card to pay for a large purchase could result in a drop of 50 points[1]. Ultimately, stay above 780, and you can expect to receive the best mortgage rates and save tens of thousands of dollars.