November 12th, 2012
Why You Don’t Need a Perfect Credit Score
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**Today’s guest post is contributed by Eric.**
Most of what you read in personal finance blogging tells you that you need a perfect credit score. While many of us think about credit scores as a quest for 850, there is really no need to have a perfect credit score.
People get new credit cards, mortgages and car loans every day. You will be hard-pressed to find someone get a new loan with a perfect credit score. The inquiry used to decide whether or not someone gets new credit alone would keep someone from having an 850 credit score.
To qualify for new credit, you simply don’t need a perfect score. A good credit score will do just fine.
Best Interest Rates
The best interest rates are reserved for people with “excellent” credit. That range generally starts at 720. In other words, you can be 130 points below a perfect score and still get the best rates. When I bought my first home last year, my credit score was around 760, or 90 points away from a perfect score. That still qualified me for the best rates from my bank.
The same goes for all loans. For a car loan or a home loan, you will qualify for the best rates without a perfect score.
Reasons to Lower Your Score
Sometimes, you want a sweet new credit card for travel rewards. I am a big fan of using credit cards responsibly to get great things in return. I recently signed up for a new credit card which got me two free round-trip flights. Doing that lowered my credit score.
According to the Credit Karma credit simulator, getting a new card with a $10,000 limit would lower my score by 2 points. Including a new credit inquiry on my report, my score would fall by a whopping 4 points.
Think about that. For the cost of four credit score points, I could get a sweet new credit card that takes me across the country and back two times! That is a value of about $300-$500. That doesn’t even include the long term value of the new card. Paying the card on time and keeping the balance low will actually improve your credit health in the long-term; it only goes down for a little while.
The most important part, for this discussion, is that my score would fall, but not by much. My score would still be well above the line to get the best rates on a new loan.
When You Shouldn’t Lower Your Score
If you happen to be in the market for a new mortgage loan, you want to ensure your score is as high as possible just to be on the safe side. Don’t worry about the free flights or 15% off from your new store credit card, think about the big picture.
A mortgage loan is likely the biggest debt you will ever take on in your life. Even a change of .25% on a typical $250,000 mortgage would cost you $9,518.21 over the life of the loan. If you are in the market for a new home, just play it safe.
Eric is from Narrow Bridge Finance, a site that helps you save time, money, and headaches when dealing with your personal finances and credit.
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