It may surprise you to learn that credit scores actually have 30 different levels. Many people assume that a search for the best credit score will yield a straightforward answer, but the reality is that there is often conflicting and confusing information available online. As someone who has worked in the realm of financial literacy and credit repair for more than fifteen years, I understand just how overwhelming it can all be. That is why I am here to provide you with honest advice on various topics - including credit scores. Over the years, I have assisted more than 20,000 clients with improving their credit scores. Now, I want to share my knowledge with you to help you achieve similar success. So, let's dive right in!
Contents:
Different Models of Credit Scoring
Understanding Credit Scores
What Credit Score Do You Need to Buy a House?
Determining a Good Credit Score to Secure an Auto Loan
Tips for Improving Your Credit Score
Insights from Joe: Powerful Strategies for Credit Improvement
Different Models of Credit Scoring
Credit scores are crucial for financial decisions like getting a loan, and there are two popular models worth noting. The FICO model and the Vantage model are both significant scoring models to understand, especially when it comes to the differences in how they calculate your credit score.
1. FICO Credit Score
The most widely used credit scoring model is the FICO model, which has eight different models ranging from FICO 2 to FICO 10 based on your credit report. A different FICO model can give you a different credit score, depending on the type of lender you use. If you are trying to apply for a home, your mortgage lender will most likely pull your FICO 5 credit report, while for a credit card, a FICO 8 credit report is preferred.
Why are there multiple FICO scores? The answer lies in each credit report's different importance level in weight. Each report has various critical factors that can impact the score differently. For example, FICO 5 mortgage report's score mostly depends on your previous mortgage history, while a FICO 8 report relies more on your credit card history. Similarly, auto lenders prefer FICO 2 reports and hold significant weight on your previous auto history.
2. Vantage Credit Score
The Vantage scoring model is a new model compared to FICO, which has been used since the seventies. Developed by the three significant credit reporting agencies- Equifax, Experian, and TransUnion, Vantage is gaining popularity as a scoring model in some sectors like personal loans and auto lending. Although FICO currently dominates the lending sector, the Vantage model is providing a good "general idea" of your credit score in the absence of your FICO score.
Is the Vantage Score accurate? It depends on the context of the question. Since the Vantage score has limited use in lending purposes, it may not accurately represent your actual lending score. However, it can be useful in giving a rough idea of your overall credit scores. With the data collected by credit reporting agencies, Vantage is rising to become one of the most accurate scoring models based on today's standards.
In conclusion, credit scoring models are essential in financial decisions. To check your different FICO scores, you can sign up on www.myfico.com, while credit monitoring websites provide free copies of your credit reports using the Vantage model. Although the FICO model currently dominates the lending sector, Vantage is emerging as a strong competitor in other sectors, providing more accurate scoring models based on today's standards.
Understanding Credit Scores
Credit scores are measured using either FICO or Vantage models, which grade on a scale of 350 to 850. A score of 350 is the lowest possible, while a score of 850 is the highest. To improve your credit score, it is helpful to know where you currently stand and what the various score thresholds represent. Here are some important thresholds:
1. 620 or below:
This is considered bad credit, indicating negative credit history, high-balance credit card accounts, or no credit cards at all. To raise your credit score, it's important to pay bills on time and to maintain at least ten active revolving credit accounts. Consider using a secured credit card like the Credit Builder Card or OpenSky Credit Card. Once your credit score reaches 620, you can typically qualify for an FHA home mortgage.
2. 640-680:
This range is deemed fair for gaining better credit. Having a score in this range indicates established credit, but it may also show derogatory marks, high balances, or recently opened accounts, all of which can lead to temporary drops in your scores.
3. 740+:
Anything above 740 is considered "super-prime" and will offer the best interest rates for most loans. If you're part of the 20% of the US population with such a score, congratulations! Keep up the great work and continue to pay your bills on time while keeping revolving credit card accounts paid.
What Credit Score Do You Need to Buy a House?
The credit score required to purchase a home varies depending on the type of mortgage loan you want to apply for. Most mortgage loans have similar requirements and guidelines due to federal regulation and government backing, but there are differences among them. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular loans and often the best "savings" loan option, excluding VA loans. These loans do not require private mortgage insurance (PMI), which can add to your downpayment or monthly payment. Conventional loans often have better interest rates and lower downpayment requirements than other mortgage loans. The typical credit score requirement is 640, and the debt-to-debt ratio cannot be higher than 43%.
FHA Loan
FHA mortgage loans are designed for borrowers with lower credit scores, usually between 580 and 619. Shop around for different lenders because loan programs have different guidelines. You must keep PMI for at least 11 years with this loan, and it has a higher debt-to-income limit of up to 50%. The downpayment requirements on an FHA loan can be as low as 3.5% of the purchase price, but the interest rate is usually higher.
VA Loan
The VA Loan does not technically require a credit score, but pre-qualification requires that you have not defaulted on previous loans or have past-due government debts. If you have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served 6 years with the National Guard, or lost a spouse during active duty, you are eligible for a VA loan. This loan typically has the best interest rates available and does not usually require a downpayment. The VA loan is an excellent program for veterans.
Determining a Good Credit Score to Secure an Auto Loan
When it comes to securing an auto loan, your credit history holds more weight in determining what you qualify for than your credit score alone. While a higher credit score is advantageous, the interest rate you qualify for is largely based on your credit history. Late payments on previous or current loans or a history of repossession can impact your approval for the loan. Even if you have poor credit, there are lenders who will qualify you for a car loan, albeit with additional criteria such as a higher down payment and dealership fee. To negotiate for the best deal, it's recommended to have equity or make a down payment.
As for credit score ranges, while there's no exact score for approval, a credit score of 680 or higher is ideal. Anything below this score may result in higher interest rates. This can be illustrated by the following example, where a higher credit score equates to less interest paid overall:
Example:
- A credit score of 720 or above results in an average interest payment of $5,500 on a loan
- A credit score of 680 or above results in an average interest payment of $6,600 on a loan
- A credit score of 650 or above results in an average interest payment of $8,100 on a loan
- A credit score of 615 or above results in an average interest payment of $10,200 on a loan
- A credit score of 580 or above results in an average interest payment of $13,900 on a loan
- A credit score of 580 or below results in an average interest payment of $15,300 on a loan
Tips for Improving Your Credit Score
Improving your credit score is a gradual process that requires patience and persistence. Rushing to improve your score will only lead to irrational decisions that can hurt it even more. Here are some actions you can take to improve your credit score:
Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent way to boost your credit scores quickly and easily. Opening a credit card is easier for someone with limited credit, rather than obtaining a large loan. A secured credit card is recommended for starting. It focuses more on your ability to pay the card on time, and has no bankruptcy history in the last two years and a current income. Revolving credit makes up 30-35% of your overall credit score. Paying your balance on time and keeping it between $5-$10 will help improve your score faster. Use the card only for small purchases.
Request a Credit Limit Increase
Requesting a credit limit increase will increase your overall credit limits and decrease your credit utilization percentage. An excessive balance on your credit card that exceeds 30% of your limits can damage your credit scores. Each credit card company has a different process, but you can call your credit card company and request a “Credit Limit Increase.†You will usually need 7-15 months of excellent payment history on a credit card to be eligible.
Pay Down Your Balances
Keeping your balance low and close to zero is critical. Use your credit cards for small purchases, and when it comes to paying your bill each month, leave a balance of about $1-$5 on your credit cards. If you have high balances, make a plan to pay them off gradually. Credit card spending habits play a significant role in your overall credit score, so it's essential to limit your use. Furthermore, the high rates on a credit card mean most of your payments will go towards interest and not principal.
Insights from Joe: Powerful Strategies for Credit Improvement
Credit problems can make anyone feel despondent and stuck. But the good news is that even if your credit score isn't great, you can turn things around if you're willing to put in the effort. Many people with poor credit have resigned themselves to a life of financial struggle, but the truth is that great credit is achievable with dedication. The first step is to assess and change your spending habits by creating a budget and sticking to it. This will have a direct impact on your credit rating. In working towards credit repair or improvement, remember that there are no quick fixes - you have to be patient and persistent. This article offers essential insights that can help you take control of your credit. If you need further assistance or support with credit repair, please do not hesitate to contact my office today at www.asapcreditrepairusa.com.
Key points to remember:
Bad credit is not permanent and can be improved with effort
Improving your spending habits is crucial to bettering your credit score
Patience and persistence are necessary for credit repair or improvement