According to FICO’s statistics, only around 1.6% of the 232 million Americans with a credit score have achieved the perfect score of 850. While it sounds like a great idea to strive for the highest score possible, some experts believe that it’s not necessary.
While maintaining a perfect score makes it easy to apply for ideal interest rates, new loans, and the best credit cards, reaching a score of 760 is likely to get you all the same benefits – and you can reach a core of 760 much easier compared to a score of 850.
Why Experts Believe 760 is the Best Score
We get it: it’s exciting and satisfying to think about being able to achieve the highest possible credit score of 850. However, reaching a score of 850 isn’t likely to come with any additional benefits you won’t already get once you reach a 760 score.
John Ulzheimer, a nationally recognized credit expert who has worked at FICO and Equifax, and is the founder of CreditExpertWitness.com, says that the best industry score for auto loans starts at 720 while the most desirable score for mortgages is around 760. In his experience, the best score that people should shoot for is 760 so they are in the best position when applying for all loan types and credit cards.
The president of the credit counseling company Illinois Credit Services, Jim Droske, also believes that the threshold is 760. According to Droske, “If you’re above 760, certainly you’re already getting the best you can get. You’ve already hit the pinnacle of what lenders care about, and anything above that is just maybe a little pride.”
How a Good Credit Score Can Affect Different Kinds of Loans
A good credit score tells lenders one thing: you know how to handle money wisely and they aren’t putting themselves at risk of default if they accept your application. Think of it this way: if a friend comes up to you asking for a loan, you probably won’t hesitate if you know they have the capacity and integrity to pay you back. On the other hand, you’ll likely think twice if your friend has a history of borrowing money and drags their feet on repaying their loans or doesn’t pay at all.
Your credit score acts as a sign of your credibility. Since it contains a detailed accounting of your financial history including bill repayment, existing loans or mortgages in your name, your bank accounts, and other financial liabilities you might have, lenders will know whether or not you’re a strong candidate for a loan.
Mortgages
In general, having a higher credit score means a higher possibility that a lender will approve your loan application. However, the score also plays a large role when it comes to mortgage terms: higher scores also mean a higher possibility of getting favorable rates.
Here’s a common example:
Let’s say borrower A is looking to purchase a home worth $300,000 with a 20% down payment. They apply for a 30-year fixed-rate loan of $240,000. Since borrower A has a credit score of 780 (which falls under the “excellent” rating), the lender gives them an interest rate of 4%.
On the other hand, borrower B, who wants to purchase the same home, applies for the same terms. Since borrower B only has a credit score of 680 (which falls under a “good” rating), the lender gives them an interest rate of 4.5%.
While 0.5% might not sound like much, that half a percent difference translates to borrower A paying around $1,164 per month in interest while borrower B pays around $1,216. When you do the math, the difference amounts to borrower B having to pay an additional $25,300 over their 30-year mortgage contract.
There are several types of mortgages where a lower credit score won’t have as much of an impact and borrowers can still avail of favorable rates even if they have a score lower than 760. For loans made through the Federal Housing Administration or the Department of Veterans Affairs, scores that fall under a “good” rating can be enough. However, you need to satisfy the requirements for each type of alternative loan.
Federal Housing Loan Requirements
Federal housing loans are home mortgages that are insured by the government and issued by a licensed bank or another approved agency. These loans typically have a lower minimum down payment compared to conventional loans and are accessible for borrowers with less-than-ideal credit scores. While it is designed to help low- to moderate-income families attain homeownership, Federal Housing Association (FHA) loans are also popular with first-time homebuyers.
FHA loans work on a sliding scale. If you have a credit score of at least 580, you can borrow up to 95.6% of the home value, and you will only be required to pay 3.5% as the minimum down payment. If you have a lower score (around 500 to 567), you will be required to pay a 10% down payment.
To qualify for an FHA loan, applicants must:
- Have a credit score of 500 minimum
- Present proof of steady employment (you can use documents such as tax returns, updated balance sheets, or profit-and-loss statements)
- Sufficient income (the front-end ratio of your liabilities, which includes your mortgage payment, HOA fees, mortgage insurance, and property taxes, must not exceed 31% of your gross income while your back-end ratio, which includes all other monthly consumer debts, must not exceed 43% of your gross income)
- Apply for a home that is appraised and approved by a qualified FHA appraiser
- Agree to use the home as their primary residence
- Agree to occupy the home within 60 days of closing
Veterans Affairs Housing Loan Requirements
The federal government offers Veterans Affairs (VA) housing loans for both active and retired service members. For those in active service, applying for a VA housing loan requires a certificate of eligibility (CoE). You can apply for a CoE if you meet the minimum active-duty service requirement. In general, you will need to have served for at least 90 continuous days without a break in service to qualify.
For veterans, the requirements will vary depending on when you rendered your service. Here is a quick list of the requirements for retired veterans:
Between August 2, 1990, and the present (Gulf War period to present)
- At least 24 continuous months, or
- The full period (at least 90 days) for which you were called or ordered to active duty, or
- At least 90 days if you were discharged for a hardship, or a reduction in force, or
- Less than 90 days if you were discharged for a service-connected disability
Between September 8, 1980, and August 1, 1990
- At least 24 continuous months, or
- The full period (at least 181 days) for which you were called to active duty, or
- At least 181 days if you were discharged for a hardship, or a reduction in force, or
- Less than 181 days if you were discharged for a service-connected disability
Between October 17, 1981, and August 1, 1990, as an officer
- At least 24 continuous months, or
- The full period (at least 181 days) for which you were called to active duty, or
- At least 181 days if you were discharged for a hardship, or a reduction in force, or
- Less than 181 days if you were discharged for a service-connected disability
Between May 8, 1975, and September 7, 1980 (post-Vietnam War period)
- 181 continuous days, or
- Less than 181 days if you were discharged for a service-connected disability
Between May 8, 1975, and October 16, 1981, as an officer
- 181 continuous days, or
- Less than 181 days if you were discharged for a service-connected disability
Between August 5, 1964, and May 7, 1975 (Vietnam War)
- At least 90 total days, or
- Less than 90 days if you were discharged for a service-connected disability
Between November 1, 1955, and May 7, 1975, in the Republic of Vietnam
- At least 90 total days, or
- Less than 90 days if you were discharged for a service-connected disability
Between February 1, 1955, and August 4, 1964 (post-Korean War period)
- At least 181 total days, or
- Less than 181 days if you were discharged for a service-connected disability
Between June 27, 1950, and January 31, 1955 (Korean War)
- At least 90 total days, or
- Less than 90 days if you were discharged for a service-connected disability
Between July 26, 1947, and June 26, 1950 (post-WWII period)
- At least 181 continuous days, or
- Less than 181 days if you were discharged for a service-connected disability
Between September 16, 1940, and July 25, 1947 (WWII)
- At least 90 total days, or
- Less than 90 days if you were discharged for a service-connected disability
US Department of Agriculture Housing Loan Requirements
The US Department of Agriculture provides a Single Family Housing Guaranteed Loan program for borrowers coming from low- to moderate-income households. Eligible applicants can purchase, build, or rehabilitate housing in a qualified rural area with 100% financing.
In order to qualify, applicants must:
- Be a U.S. citizen, U.S. non-citizen, or registered, qualified alien
- Agree to personally occupy the dwelling as their primary residence (or relocate as necessary)
- Meet the income eligibility threshold (cannot exceed 115% of median household income)
Car Loans
Just like with applying for a home loan, applying for a car loan with a good credit score means going into negotiations with a strong footing. According to 2023 report by Experian, the average credit score for a used-car loan is around 690 while the average score for a new-car loan is around 735. The same report states that around 70% of loans were approved for borrowers with credit scores of 661 or higher, while borrowers with scores of 500 to 600 accounted for around 13%. Less than 2% of financing applications were approved for borrowers with scores of less than 500.
Your credit scores will help you budget for a car loan since interest rates differ depending on your score. Fair or better scores have an annual percentage rate (APR) of around 6.8% or better, while poor scores and below have APRs of around 9.3%.
While you can use a car loan calculator to get an idea of your possible APRs, here’s a great table from Experian that you can use as a rough guide:
[INSERT EXPERIAN GUIDE HERE]
If you’re applying for a $20,000 used-car loan with no down payment and five years to repay, you’ll be paying $418 a month if you have a score of 700 or better. On the other hand, if your score is in the mid-500s or lower, you will shell out $512 a month under the same loan. In the first scenario, you will pay out $5,102 in interest over the life of the loan while in the second, you will pay $10,727. That’s more than double the amount!
Final Thoughts
Whether you’re applying for a mortgage or a car loan, having a good credit score puts you in the best position to qualify for the best deals, the lowest interest rates, and better options overall. Aside from having the strongest position to negotiate with borrowers, you can also access better choices when it comes to homes and cars you want to purchase.
If you’re having trouble understanding how your credit score can affect loan applications, feel free to reach out to our credit experts! Our dedicated and experienced team is happy to help guide you through the process so that you can find the best loans to fit your needs and your budget.