Were you aware that there are actually 30 distinct levels of credit scores? It's a fact that often goes overlooked, even among those who are actively seeking information about improving their credit. Many times, a simple search engine query for "best credit score" can yield a confusing and often contradictory set of results. As someone who has spent over 15 years working in financial literacy and credit repair, I've seen firsthand how this type of information overload can be overwhelming - and sometimes even lead people down the wrong path. Hi, I'm Joe Mahlow, and my mission is to provide clear, honest guidance on a variety of personal finance topics, including credit scores. Over the years, I've helped more than 20,000 clients boost their credit scores and take control of their finances. Now, my hope is to share some of that knowledge with you. So let's dive in!
Contents:
Different Types of Credit Scores: An Overview
What Defines an Excellent Credit Score
What credit score do I need to buy a home?
Determining a Good Credit Score for Car Financing
Ways to Improve Your Credit Score
Joe's Insights on Improving Your Credit
Different Types of Credit Scores: An Overview
Credit scores are essential when it comes to your financial well-being, and it's crucial to understand the different scoring models that exist. In this article, we'll take a look at two main models, the FICO and the Vantage, and explain their differences and which sectors use them most.
FICO Credit Score
The FICO model is the most widely used credit scoring model. Here are some key features of FICO credit scores:
- FICO has eight different models, which means you may receive a different credit score depending on the model your lender pulls.
- Each FICO model has a specific weight assigned to different aspects of your credit history. For example, if you're applying for a mortgage, the lender will most likely pull your FICO 5 credit report, which will weigh heavily on your previous mortgage payment history. If you're applying for a credit card, FICO 8 will be used, and your credit card history will be a significant factor in determining your credit score.
- To get an idea of your different FICO scores, you can visit www.myfico.com and sign up for an account.
Vantage Credit Score
The Vantage score is a credit scoring model developed by the three major credit reporting agencies, Equifax, Experian, and TransUnion. Here's what you need to know about Vantage scores:
- Compared to FICO, Vantage is a relatively new scoring model, and it's not yet as widely used.
- Some sectors, such as personal loans and auto lending, are starting to use Vantage scores.
- While Vantage scores are accurate, they may not reflect your actual lending score since FICO is still the most recognized model in the lending sector.
- Vantage scores can provide a good idea of your overall credit scores, and you can obtain a free copy of your reports through credit monitoring websites.
In conclusion, while different types of credit scores exist, understanding the FICO and Vantage models can help you make more informed financial decisions. Keep in mind that your credit score is only part of the overall financial picture, and it's always important to stay on top of your credit report and work towards improving your credit health.
What Defines an Excellent Credit Score
Having a good credit score can be identified through both the FICO and Vantage scoring models, with scores ranging from 350 to 850. The higher the score, the better. It is important to know your score range to set meaningful goals and track your progress. Below are some significant score thresholds to consider:
1. 620 or below
If your score falls in this range, you have bad credit history, possibly due to a lack of credit cards or high-balance credit card accounts. A good way to boost your credit is to make prompt payments and open ten active revolving credit accounts. Try using a secured credit card such as the Credit Builder Card or OpenSky Credit Card. Once you reach the 620 credit score, you will qualify to receive an FHA home mortgage.
2. 640-680
Scores in this range indicate fair credit. You would have established some credit history; however, you might have derogatory marks or accounts on your credit report. High credit card balance or newly opened accounts are other possible factors that might affect your score. But don't worry, if you recently opened a new account, this is a temporary effect, and you will soon recover your scores.
3. 740+
Scores above 740 are classified as super-prime, putting you in the top 20% of the U.S. population. This high credit score will qualify you for the best interest rates on most loans. Ensure you maintain your credit score by making timely payments, managing your credit card usage, and striving always to keep your revolving credit card accounts paid. Well done if you have this score, keep up the great work!
What credit score do I need to buy a home?
The credit score needed to buy a home depends on the type of mortgage loan you want to qualify for. The requirements and guidelines for most mortgage loans are similar. However, they vary based on the type of loan you choose. Here are the three most common mortgage loan types and their requirements.
1. Conventional Loans
Conventional loans are the most popular and cost-effective loan option besides VA loans. They don't require you to maintain private mortgage insurance (PMI), which is an extra expense that raises your downpayment or monthly payment. When taking out a conventional mortgage loan, you typically need a credit score of 640 and a debt-to-income ratio that doesn't exceed 43%. Conventional loans generally have better interest rates than other mortgages. Moreover, they have lower downpayment requirements.
2. FHA Loans
The FHA mortgage loan is suitable for people with lower credit scores between 580 and 619. If you meet the credit score limit, shop around for different lenders to get the best financial option. FHA loans include PMI that you must maintain for at least 11 years. They have a higher debt-to-income limit of up to 50%, allowing low-income earners to buy more houses than they could with a conventional loan. Additionally, the downpayment requirement for FHA loans is as low as 3.5% of the purchase which allows you to pay for the mortgage with less money out of pocket than a conventional loan. The only setback is that the interest rates on these loans are typically high.
3. VA Loans
To qualify for VA loans, there isn't a specific credit score required. However, lenders pre-qualify you based on any previous defaulted loans and overdue government debts. To be eligible for a VA loan, you must have served in the United States Military for at least 181 days, served for 90 consecutive days during war, served 6 years with the National Guard, or your spouse was in the military and lost their lives during active duty. Veterans Affairs loans are generally the best since they offer lower-than-average interest rates and don't require down payments. VA loans align well with the government's efforts to give back to our veterans.
Determining a Good Credit Score for Car Financing
When applying for car financing, your credit history carries more weight in determining approval than your credit score, despite the latter being important. Lenders use your past and current credit histories to decide if extending credit poses a risk. Those with late payments, prior repossession, or other credit issues will have a harder time securing loans. Nevertheless, dealerships can help you obtain such loans at higher costs, including higher fees and down payments. The ideal credit score range for car financing is above 680, and anything below this score will result in higher interest rates due to the perceived risk. For example, individuals with credit scores of 720 or above pay an average of $5,500 in interest on car loans, while those with scores below pay over double that amount. Ultimately, having a higher credit score leads to paying a lower interest rate, saving you money in the long run when financing a car.
Ways to Improve Your Credit Score
Improving your credit score can be achieved effortlessly by undertaking several actions. Keep in mind that establishing good credit takes time and isn't an instant process. Thus, patience is crucial in the building process since hasty decisions lead to poor use of credit, worsening your financial standing. You can take the following measures now to boost your credit score:
1. Open 3-5 revolving credit accounts:
Revolving credit is an optimal option to achieve maximum credit scores. Without an extensive credit history, it takes much effort to build an impressive record through obtaining a large loan. A secured credit card that disregards credit scores is a great starting point. Open Sky and Credit Builder Card are highly recommended options that focus on your ability to pay your bills. Revolving credit comprises 30-35% of your overall credit score, making it a feasible, quick avenue to upgrade your credit worthiness. Note, however, that it can take 2-4 months for the benefits to show. Ensure you meet your payment deadlines and retain a $5-$10 balance after each payment. Only use the card for small purchases like gas or groceries.
2. Increase Your Credit Limits:
If you have active revolving credit cards, request a credit limit increase promptly. This action boosts your credit limit and lowers your credit utilization percentage. High credit utilization is detrimental to your credit scores since most credit card users exceed 30% of their overall credit limits. Contact your card company to ask for a “Credit Limit Increase†and fill in the required information, including your income. Note that before a credit limit increase is granted, an excellent payment history for at least 7-15 months is necessary.
3. Pay Down Your Balances:
Maintain a low balance on your cards. You can opt not to use your cards each month. It is advisable to use them for minimal purchases only, leaving roughly a $1-$5 balance. If your balances are high, make a concrete plan to pay them off using a certain percentage of your paycheck each month. It is not wise to pay off credit card balances only to run them up again shortly after since your credit card usage highly affects your overall credit score. Also, credit card rates are usually steep, and high interests eat up most of your payments, leaving little, if any, principal.
Joe's Insights on Improving Your Credit
We have all found ourselves struggling with poor credit at some point. However, by taking your credit situation seriously and committing to working on yourself and your credit, you can experience significant improvements in your credit score in a short amount of time. Many people with bad credit feel stuck in a cycle of credit issues and find it impossible to improve their situation. But the truth is, attaining a great credit score requires dedication and focusing on your spending habits. Begin by making a budget and working towards correcting any unwise spending decisions - this will have a direct impact on your credit score. If you need guidance and support in improving your credit, including credit repair services, don't hesitate to reach out to my office at www.asapcreditrepairusa.com.