It may surprise you to learn that credit scores come in 30 different levels. Thus, when searching for the best credit score, you might receive a wealth of varying responses from Google. Unfortunately, much of the information available can lead you astray or seem overwhelmingly complex. As an experienced financial literacy and credit repair specialist of 15 years, my name is Joe Mahlow, and I aim to provide you with straightforward advice on relevant topics like credit scores. Throughout my career, I've helped more than 20,000 clients elevate their credit scores, and I'm eager to share my knowledge to support you on your own journey. So, let's dive in.
Contents:
Different Types of Credit Scores: Understanding FICO and Vantage Models
Understanding Credit Score Ranges
Good Credit Score for House Purchase
What Credit Score is Needed to Finance a Car
Tips on Improving Your Credit Score
Insights by Joe: Empowering You to Improve Your Credit Score
Different Types of Credit Scores: Understanding FICO and Vantage Models
Credit scores are essential for many aspects of personal finance, from buying a house to applying for credit cards. You may be familiar with the two main credit scoring models used by lenders: FICO and Vantage. Understanding the differences between these models can help you better manage your finances and plan for the future.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used. With eight different FICO models available, you may receive a different credit score depending on your credit report. This is because each report has a different "weight" assigned to critical factors for that specific lender. For example, a mortgage lender will pull your Fico 5 credit report, while a credit card company will most likely pull your Fico 8 credit report. By seeing all your different credit scores, you can get a better understanding of how your credit history impacts your overall scores.
Vantage Credit Score
The Vantage Score scoring model is a newer competitor to FICO and is gaining popularity in some sectors, such as personal loans and auto lending. It was developed by the three major credit reporting agencies to compete with the FICO model. While it can be a good “general idea†of your FICO score, the Vantage score is not widely used for lending purposes. That being said, it is still an accurate way to get a sense of your overall credit scores.
It's important to note that credit reporting agencies are the most significant data collection agencies outside of social media companies. As such, they have the upper hand in providing the best scoring data available. While FICO currently dominates the lending sector, the Vantage model may become more widely used in the future as it is updated to reflect today's standards.
Understanding Credit Score Ranges
When it comes to credit scores, both FICO and Vantage models rank scores on a scale of 350 to 850. A score of 350 is the worst credit rating considered, while 850 is deemed the best credit score attainable. Knowing how you are faring on your credit journey is crucial in building your credit score over time. Here are some essential score thresholds you should keep in mind:
1. 620 or below
A credit score of 620 or less is categorized as bad credit. You are most likely to have a history of unfavorable credit, high-balance credit card accounts, or no credit card accounts at all. The best way to improve your scores in this range is to keep payments timely and maintain at least ten active revolving credit accounts. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can also help you improve your credit rating. If you improve your credit score to the 620 range, you can qualify for an FHA home mortgage.
2. 640-680
This score range is considered fair for good credit, which implies you have established credit. However, your credit report may contain derogatory marks or accounts, and you may also have high balances on your credit cards that you need to pay back. Also, recently opened accounts can temporarily lower your credit score. If you're in this range, a temporary drop in your scores is nothing to worry about, as your scores will likely increase in due course.
3. 740+
A credit score of 740 or higher is referred to as "super-prime" and usually attracts the best interest rates for most loans. If you have a credit score of 740 or more, you belong to the 20% of the US population whose credit scores fall in this category. Congratulations on achieving this remarkable feat! You must keep up the good work, maintain timely payments, and keep your revolving credit card accounts paid up to remain in excellent credit standing.
Good Credit Score for House Purchase
When it comes to buying a house, the required credit score varies depending on the type of mortgage loan. Most mortgage loans have similar requirements and guidelines due to government regulations and backing. The three most common types of mortgage loans are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular and offer the best saving option apart from VA loans. PMI is not required for conventional loans; hence, they require a lower downpayment compared to other mortgage loans. The credit score requirement for conventional loans is typically 640 with a debt-to-debt ratio not higher than 43%, making it a better option for buyers with a good credit score.
FHA Loan
If your credit score is lower, FHA loans are for you. It typically requires a credit score from 580 to 619. However, all loan programs vary, so shopping around is advisable if you fall within the credit score limits. FHA loans typically require PMI for at least 11 years and a higher debt-to-income limit of up to 50%. Although the down payment requirement can be as low as 3.5%, interest rates are usually higher.
VA loan
VA loans do not technically have a credit score requirement. Still, they look at previous defaulted loans and government-owed past-due debts when pre-qualifying you. To qualify, you must have served in the US military for at least 181 days, served during wartime, had six years of National Guard service, or had a spouse that lost their lives during active duty. VA loans usually have the best interest rates and do not require a down payment, making it the perfect option for veterans.
What Credit Score is Needed to Finance a Car
When financing a car, while having a good credit score is important, your credit history is the primary factor that lenders consider. This is because they assess your previous and current credit histories to determine the level of risk involved in extending credit. A high credit score plays a lesser role in the interest rate that you qualify for. Having said that, lenders heavily scrutinize applicants with credit issues, such as someone who has had late payments on previous loans or has a record of repossession.
Special finance lenders, on the other hand, may qualify almost anyone for a car loan, but the approval comes with specific criteria such as a higher down payment and additional fees to mitigate the risk of default. Dealerships sometimes pay for these fees themselves. It is recommended to have at least some equity or a down payment when applying for a car loan to improve your negotiating power.
Credit Score Range for Car Loans
While there is no exact credit score to determine approval, having a credit score over 680 is considered ideal. Failure to meet this threshold increases the interest rate charged by the lenders due to increased risk. The data shows how a credit score impacts the amount of interest charged on a car loan, with lower scores having more associated interest:
- A 720 credit score or above will be charged approximately $5,500 in interest on the loan.
- Someone with a 680 credit score or above will pay, on average, $6,600 in interest on a loan.
- Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
- Someone with a 615 credit score or above will pay, on average, $10,200 in interest on a loan.
- Someone with a 580 credit score or above will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score of 580 or above will pay, on average, $15,300 in interest on a loan.
It is evident that a higher credit score will reduce the amount of interest paid and improve your overall credit score.
Tips on Improving Your Credit Score
Improving your credit score takes time and effort but can be achieved with some simple strategies that you can start right now. Your patience will pay off since developing a good credit score is crucial and cannot be achieved overnight. Rushing and making impulsive financial decisions will only make your situation worse. Here are three things you can do to improve your credit score:
1. Open 3-5 credit card accounts:
Revolving credit accounts such as credit cards give you a better chance of getting approved and increasing your credit score, especially if you have limited credit history or need to rebuild your credit score. Consider opening a secured credit card like Open Sky or Credit Builder Card which focus more on your payment history and not solely on your credit score. Such revolving credit accounts can help you quickly build your credit score, with a maximum impact of 30-35%, but ensure you pay your balance on time and limit it to $5-10.
2. Raise your limits:
You can request a credit limit increase to expand your credit limit, which will lower your credit utilization percentage. A high credit utilization percentage can hurt your credit score, so keeping it below 30% is essential. To increase your limits, call or log into the online portal of your credit card company and ask for a credit limit increase. They may require personal information such as your current income, and excellent payment history of 7-15 months.
3. Pay down your balances:
Keep your credit card balance low and try not to exceed 30% of your overall credit limits. Leave a balance of $1-5 on your credit card when you pay your bills each month. If you have trouble paying off your credit card balances, come up with a plan to clear your debt gradually. Also, avoid running up your balances since your credit card spending habits significantly affect your overall credit score and will cost you more in interest payments.
By following these tips and maintaining consistent and good payment practices, you can improve your credit score gradually.
Insights by Joe: Empowering You to Improve Your Credit Score
Many of us have experienced the struggles that come with poor credit scores. However, if you are committed to bettering your financial situation and taking the necessary steps to improve your credit, you can expect to see significant progress in a short amount of time. It is common for people to feel stuck in a cycle of bad credit, but with dedication and a focus on developing healthy financial habits, you can break free from this cycle and start building a strong credit score. A helpful starting point is to create a budget and address any negative spending behaviors, as these actions will directly impact your credit score. This article provides valuable insights into the world of credit, but if you require further assistance or credit repair services, please contact our office at www.asapcreditrepairusa.com.
Key Points:
- Poor credit scores can be improved with effort and commitment
- Addressing negative spending habits is a great starting point for improving your credit score
- Seeking guidance and credit repair services can provide additional support in improving your credit.