How much does credit score matter?

Question

The higher your credit score, the better. If you ever had the choice of two different credit scores, you are always better off preferring the higher one.

However, while the utility of a higher score is always positive, it is not always large. Sometimes it may even be minuscule. Since having a higher score takes effort (and possibly money) it's not uncommon to end up in a situation where increasing your credit score isn't worth it, since the benefits are too little.

For example, in this answer it is claimed that:

there is no difference between a 750 score and an 850 score; you are already eligible for the best loan rates.

I was curious: What are the major breakpoints of credit scores where it does matter? Are there major score thresholds, that once you pass them, you suddenly experience tremendous noticeable benefits (like suddenly qualifying for a whole class of better credit)? Are there ranges of score (like the 750-850 asserted above) where, it doesn't really matter which part of the range you are in, you still enjoy the same benefits financially?

Answer 1

There are lots of opinions on the meaning of different credit scores. Each lender can ultimately choose whatever cutoff they want for their products.

Creditscoring.com has a fascinating page that they call The Bar. It is a series of quotes from different credit reporting agencies, news outlets, and lenders about what different scores mean. The quotes are sorted by score, and it is interesting to see the different opinions about what is considered an excellent score, what is considered average, and what is a poor score.

Looking at the list, you can find quotes on the bottom cutoff for excellent scores anywhere from 760 down to 620. Similarly, the opinion on the top cutoff for a poor score ranges from 650 all the way down to 580. There is no consensus.

I know when I was looking for a new credit card a year ago, most credit card sites had you select a range of credit card scores so that you would know which cards you might be eligible for. I think when I looked at CapitalOne's website last year, they described excellent credit as a score of 720+, eligible for every one of the credit cards they offer. Looking at their website now, they don't even list ranges of scores anymore. They simply describe excellent credit as this:

"I have never declared bankruptcy or defaulted on a loan. I have not been more than 60 days late on any credit card, medical bill, or loan in the last year. - AND - I have had a loan or credit card for 3 years or more with a credit limit above $5,000."

When I wrote the "no difference between 750 and 850" answer, I had this 720+ score in mind. Once you get in that range, you aren't going to be turned down for any loan because of your score. (You might get turned down for something because of a lack of income, but that is different.) Remember, financial institutions do not want to reject people for loans. Loans are how they make money. If they had a loan product that required a score of 820, there would not be a large market of people eligible for it.

Answer 2

Having a more-than-adequate score need not take effort. Normal economic activity over the years, being careful to pay on time and otherwise not do anything blatently stupid, is probably quite sufficient.

(I'm convinced that the obsession with credit scores has been deliberately drummed up by those selling advice on how to improve your scores. If you've damaged yourself badly, competent advice may be helpful to get out of that hole. Otherwise... "Our white tuna is guaranteed not to turn pink in the can!")

Answer 3

Credit scores have mutated into an overall trustworthiness grade that are used for a lot of purposes other than getting good interest rates.

For example:

• Insurance companies are factoring them into their calculations regarding how likely you are to make a claim.
• An especially bad credit score can hurt your chances of getting a Government security clearance.
• Employers can use negative information on your credit report to make hiring, firing and promotion decisions (except for bankruptcies)
• Landlords may use them to decide whether to rent to you, and how much deposit to charge.
• Cell phone providers use them to decide what payment plans you can get.
• Utility companies sometimes use them to decide how much deposit you need to pay.

And obviously anything involving getting a loan and setting the interest rate.

Answer 4

I had a client looking to buy a house, and the bank told her she needed 630 to be approved for their normal loans. Lower than that, and the rate jumped, quite a bit.