The Quest for the Perfect Credit Score

(MONEY Magazine) -- A major league pitcher dreams of throwing a perfect game. High schoolers eyeing the Ivy League study furiously in hopes of earning 2400 on the SAT. Meanwhile, Chris Peplinski is pursuing his own brand of flawlessness: an 850 credit score.

The 37-year-old stay-at-home dad from Rogers, Ark., has already nabbed 813 on the FICO scale, the credit scoring system most lenders use in sizing up potential borrowers. That ranks him above more than 82% of Americans and comes with a big payoff: It entitles him to ultralow rates on loans, saving him tens of thousands of bucks over a lifetime.

Nevertheless, Peplinski won't be satisfied until he hits the maximum, 850. Why? "Your credit score tells a lot about you," Peplinski explains. "A high score means you're responsible and in control of your life. You're trustworthy."

To reach his goal, Peplinski voraciously reads up on every element that goes into a FICO score, checks his number every three months, and tweaks his behavior to eke out every possible additional point -- including taking out a car loan two years ago even though he and his wife Chrissy had the cash to buy their wheels outright. He figured that adding to his mix of credit might boost his score.

In spite of Chris's best efforts, landing an 850 may be a quixotic goal only about 0.5% of Americans manage it, FICO reports. "The 850 score is kind of like a unicorn," says John Ulzheimer, a credit scoring expert with Credit.com who used to work for FICO. "Everybody talks about it, but nobody's seen it."

The reality is that you don't need to catch the unicorn to catch the best rates. But adopting some of the habits of Peplinski and other members of the 800 club can help you improve your own score. And that can translate into real money: On a $300,000 30-year fixed-rate mortgage, the most credit-worthy borrowers will pay $14,200 less than those one tier below, $25,600 less than those two tiers below.

FICO, the Minneapolis company that produces the scoring model, divulges the five factors that determine your magic number your payment history, the amount you owe on credit lines and loans, the length of your credit history, how much new credit you've applied for, and the types of accounts you've had plus what percentage of your score each factor represents (see page 90). But as for exactly how many points you'll gain or lose for, say, taking on a mortgage, being late on a bill, or charging credit cards up to the max? That's proprietary information: "It's a black box," says FICO spokesman Craig Watts.

Mystery feeds obsession. Much the way fans of TV's Lost met up online to postulate theories on the show's ending, some credit score aficionados passionately debate their hypotheses on message boards like the FICO Forums at myfico.com. Others use themselves as guinea pigs to discover which moves will nudge a score up or down.

While most people could tell you their number only from the last time they got a loan if at all true FICO fiends know their score as well as they know their spouse. Of the score strivers MONEY interviewed, most check their score obsessively, at least every few months at a cost of $50 or more a year. They also fixate on their credit reports, upon which the scores are based. Leland Lim, a 41-year-old doctor from the Bay Area, is vigilant about scanning these for errors that might drag down his number. "It took me three years to get a derogatory entry on one of them corrected," says Lim, who now earns an 806.

As for what makes an 800-plus score, these self-made experts basically say the same thing FICO does: Payment history is the single most important factor. "I have this fetish about paying bills as soon as they come in the house," says Dick Husemann, 66, a retired Air Force officer from Wilmington, N.C. He and his wife, Brenda, 69, attribute their high scores matching 818s to the fact that they've never missed a credit payment.

The Husemanns also never charge more than 10% of their credit limit. They're not alone in that; most score enthusiasts aim to keep a low "utilization ratio," or the amount they owe compared with the amount of credit available to them. FICO verifies that a low ratio can help your score.

Chris Peplinski used his knowledge of this principle to help his wife boost her number. When they met seven years ago, Chrissy's credit cards were maxed out and her score was a low 466. (Today he jokes: "I tell people when they're dating someone new, ask about your date's credit score!") Chris helped her get on a repayment plan. A sales manager for General Mills, Chrissy now has tons of available credit she's not using and a score of 786. Chris occasionally applies for additional credit cards to goose the couple's credit lines further, even though he knows the FICO model will ding his score in the short term for opening a new account.

That kind of gamesmanship is all part of the quest for 850. With lenders now routinely closing inactive accounts, Lim rotates all his credit cards into circulation so that he'll continue to have a lot of available credit to figure into his utilization ratio. But because his charges also affect that ratio, a few months before applying for a loan, he stops using the cards or pays them off before the statement is generated. That way, he says, "my score jumps a bit" just in time for the lender to see.

The 800 club members are also conscious of their mix of credit. Lim became interested in the scoring process two years ago while refinancing a home-equity loan into a home-equity line of credit. Having heard that revolving debt could affect a score more than an installment loan, he studied up. His research revealed that HELOCs are not considered revolving debt in the FICO model. (The scoring firm confirms.) And remember that car loan Peplinski took out even though he didn't have to? He did it because FICO favors those with a variety of credit types, such as mortgage, credit cards, and auto loans. "I probably paid $100 in interest," he says. "But it was worth it because we raised our credit scores by 15 points."

So is it worth obsessing over your three digits or even 15 measly points as these folks have? There's no doubt that a high credit score can do sweet things for your wallet. But experts say it's not worth pursuing the elusive 850.

The more practical goal is to reach the score threshold that will get you the lowest possible rate on any kind of loan the "promised land," as Ulzheimer calls it. "Today that's 780 and up," he says, noting that it used to be more like 720 in the pre credit crisis era. (See the chart at right for cutoffs on specific loans.) Matt Hackett, an underwriting manager for mortgage lender Equity Now, says essentially the same thing: "Whether you have 780 or the highest score possible, you'll qualify for the same rates."

Of course, snagging the best rates isn't the only thing that motivates the score superstars MONEY talked to. Being among the credit elite has intangible benefits as well. For the Husemanns, a high score "is a continuing reminder of our commitment to stringent financial discipline," Dick says. And the Peplinskis think of their plump number as a kind of cushion: If Chrissy lost her job, and the couple needed to rely on credit cards, their score would not be devastated. "I can sleep better at night," says Chris.

On the other hand, some lenders think there's such a thing as too good a score. After all, the most responsible borrowers are unlikely to rack up credit card finance charges and late fees. A recent lawsuit filed against World Financial Network National Bank, which issues several retail credit cards, claimed the issuer was planning to deny applicants with scores 800 and up because such people did not generate profit. (The card company declined to comment.) Still, "for every bank that would penalize you, five more would welcome you," says Wayne Sanford, owner of credit consulting firm New Start Financial Corp.

You may already have a sense of whether or not you're over the 780 threshold, but if you want to know your exact score, you'll have to shell out $16 at myfico.com. (The best free scoring tool, the report card at Credit.com, gives you only a letter grade and a range your score probably falls into.)

You actually have three credit scores, one for each of the three major credit bureaus: Equifax, Experian, and TransUnion. Mortgage lenders pull all three. Though based on the same model, these scores can differ typically by no more than 15 to 20 points, says Watts of FICO depending on how lenders report to the bureaus and how the bureaus include that information in the report. At myfico.com, you have the option of buying only your Equifax or Trans-Union score; Experian doesn't sell its FICO score to consumers. If you're shopping for a home loan, get the two available to you.

Scores change whenever your creditors report new information like your credit card balance so if you're in the market for a big loan, start monitoring your number six to 12 months beforehand. You might also find it useful to sign up for a tool like Equifax's Score Watch, which for $13 a month will alert you when your score shifts. For those who aren't loan shopping, there's no need to check your number more than twice a year, says Sanford.

And if you find out you're not in the promised land? While there's a lot to learn from our credit score superstars, you don't need to be fanatical to get to 780, experts say. Those in the know say these moves matter most:

Stay on top of your credit reports. You're entitled to one free copy per year from each bureau. Get 'em at annualcreditreport.com, and look for misreported delinquencies, over-reported loan amounts, and underreported credit limits. Request corrections from the bureau in writing.

Pay bills within the grace period. Lenders report tardiness to the bureaus once you're 30 days past due; if your score started at 780, it can go down to 680 after just one delinquency, says Watts. So set up payment reminders or have payments automatically deducted by a certain date.

Focus on paying off credit cards vs. other debt. Whittling down revolving debt will do a lot more for your score than erasing installment loans. Paying off a $250,000 mortgage when your score is already high will boost it by only five or 10 points, says Watts. But wiping away a few thousand bucks on plastic can add 100 points.

Stay under the magic 10%. Just paying credit card balances off every cycle doesn't mean you have a 0% utilization; issuers report the total amount you charge each month to the bureaus. That suggests you should use credit cards sparingly, says Watts. Aim to spend no more than $2,000 on a $20,000 line; and put cards on ice a few months before applying for a loan.

Have a favorite credit card. The FICO model penalizes you for having multiple balances, so limit the bulk of your spending to one card. That said, issuers are closing inactive lines, which can hurt your utilization ratio. So make small charges to your other cards every three months or so.

Ask FICO what else will work for you. FICO offers a free Score Simulator tool to those who buy scores on myfico.com, and this allows you to see how your score would respond within a range to certain actions, such as paying down debt or even taking on new loans. (For most people, it's not worth borrowing, à la the Peplinskis, just for the sake of your credit mix. Experts say you can score 780 without having had every kind of loan imaginable.)

And if your score is already above 780? The same advice still applies, though you probably don't need the simulator. You want to focus on maintenance rather than trying anything tricky, warns Ulzheimer: "It's easier to lower an 800 than it is to increase it."

There's little hope that such advice would dissuade Peplinski from his pursuit of perfection. "It's kind of like climbing Everest," he says. "I want to get to the summit and see the view from the top."