I have pretty good credit — right now my score is close to 800. Awesome, right? Sure, except that awesome credit has actually been pretty useless, even when I recently bought a home. Don't get me wrong, bad credit has a big impact on your finances. It's strange, then, that excellent credit doesn't really matter. Illustration by: Angelica Alzona
The whole idea of credit scores is flawed to begin with. We tell people there's this single number to judge their financial worthiness. That's a scary prospect. In reality, there are actually many credit scores, not just one. Banks use their own scoring system to approve or deny your applications, for example. In the US, where there's more emphasis on credit scores than in Australia, FICO is probably the king of credit scores, and even they provide a few different models. It's up to the lender to decide which model they use.
NerdWallet notes that the average FICO score is 695, so most people have good credit, but 22 per cent of people also have scores below 600. Now, I'm not suggesting credit doesn't matter at all. It sure as hell matters when it's bad. There are several ways bad credit can make your life difficult, but here's a brief recap:
- Higher pay TV, phone or internet bills
- Higher insurance premiums
- Higher loan interest rates
- Harder to apply for an apartment
Common assumption is that bad credit just means you can't get a good rate on a mortgage or a car loan, and the solution is to just not buy a house or a car — rent and take public transportation. Fine, let's say that's fair enough. But bill providers are still allowed to charge you a fee for having shitty credit, and when you try to rent an apartment or even get a job in some cases, your poor credit follows you around like a bad smell.
If you have excellent credit, it seems the opposite should be true: You get a discount on your bills, you're automatically approved for your dream apartment and so on. It doesn't work that way, though.
The Few Perks of Excellent Credit
Alright, maybe I'm being a little cynical. Excellent credit has some perks. For example, I can easily get approved for huge lines of credit. On the other hand, I never use those lines of credit because I pay my debt in full every month, which is why I have good credit to begin with. If I were to max out my credit lines, my credit score would drop, and before you know it, I'd have to deal with all the drawbacks of having poor credit. So I don't exactly jump up and down when my credit card company congratulates me for expanding my credit limit.
But a high credit limit is good, you might say. If you have a high limit and you don't use it, your credit will improve! That's true, but that logic is a little absurd. I get a higher limit to improve my credit... for what? An even higher limit I won't use? And if I do use that, my score drops, making the whole perk pointless. It's like having a phone that only calls itself and also stops working if you actually use it.
If you have good credit, you're probably also more likely to get approved for credit cards with low interest rates. Again, that doesn't really matter if you're not in debt.
My rewards credit cards are pretty good, and perhaps that's one perk of having excellent credit, but as MoneyUnder30 points out, you have a good chance of being approved for most credit cards as long as your score is at least 700. You don't need an excellent score. You just need a score that's good enough.
Excellent Credit Doesn't Matter, Even When You Think It Should
For a while, I was really excited to have awesome credit because I knew it would finally pay off when I applied for a mortgage. Only it didn't.
First, the lender told us they'd have to go with my fiance's score, since we were buying the house together and his name would be on the loan, too.
"His score is like, 100 points lower than mine, though. You don't consider mine at all?" I asked.
"No, not really," our lender said.
We tried to get around this with my name only on the loan. Sure, we were approved for a smaller amount since we only had one income on the application, but that would be fine if it dropped the rate substantially. It didn't, though. Our rate together with mediocre credit: 4.8 per cent. The rate on my own with excellent credit: 4.2 per cent. Eventually, we decided to go with an FHA loan which had a much lower rate (3.3 per cent) that was the same whether we applied together or separately. Yes, you have to pay a premium with your FHA loan, but we crunched the numbers, and it was still cheaper, considering the interest rate that even my excellent credit could nab.
In his own post questioning credit scores, personal finance writer (and part-time landlord) Sam Dogen says that a clean credit report is only one of several factors he considers when approving a tenant. There's also their employment record, references and the ability to cover several months' worth of rent in case they lose their job. Landlords weed out applicants with bad credit, but that doesn't mean excellent credit is going to speak much to your chances. It's hard to quantify this, because it's totally up to the landlord's discretion, but chances are, an 800 score isn't going to help you beat out an applicant who earns twice as much as you, even if their score is only 740.
Dogen also pointed out that when he went to lease a Honda Fit, the dealer really didn't care what his score was.
At $19,025 pre-tax, the Honda Fit is at such a low price point, they are used to plenty of people with mediocre credit scores buying such a car. The same goes for the Honda Civic. Most people making the median household income of $52,000 a year should be able to swing a $235 a month car payment.
When my fiance leased his C-Max, we found the same thing. When haggling with the dealership, they said his 700 credit score might work against him with the financing. So we called them out and said we'd put my name on it instead and use my 800 score. They relented and admitted that the rate would actually probably be the same.
Bottom line: Excellent credit has served zero purpose in my life so far.
Excellent Is Just as Good as Perfect
Most of us have learned that going above and beyond pays off. This doesn't seem to apply in the world of credit: You don't need to excel, you just need to be good enough. Otherwise, you're wasting your time. Here's how Forbes contributor Adam Levin puts it:
The idea of "gaming" your already-excellent credit score to drive it up is not going to benefit you in any real substantive way — there's little or no difference between the interest rates or credit terms offered to people with an 800 and those offered to people with the elusive 850. So gaming it doesn't help anything but your ego.
Dogen agrees, saying that after dealing with various mortgage officers over the years, he's learned that once your score is over 740, "it doesn't matter how much higher your credit score is. You will always be offered the best borrowing terms."
As long as your credit isn't terrible, you're going to get the same level of perks at "good" as you will at "excellent".
Of course you want good credit, but not because it opens the door to some magic financial world, but because having bad credit can be a pain. Excellent credit might get you a lower mortgage rate, but bad credit will definitely get you a terrible rate. Excellent credit might help ensure your rental application doesn't get tossed out, but bad credit will ensure it definitely does get trashed.
In other words, when it comes to credit, there's little point in striving for excellence. You just need to strive for "not bad".