It may come as a surprise, but there are actually 30 levels to credit scores. Many people are unaware of this fact and often turn to Google for answers on how to obtain the best credit score. However, the information available can be confusing and misleading, resulting in frustration and confusion. I’m Joe Mahlow and I have over 15 years of experience in the financial literacy and credit repair field. My aim is to provide you with the unfiltered truth on topics like this one - credit scores. To date, I’ve helped more than 20,000 clients improve their credit scores and I hope to equip you with the knowledge to do the same. So, let’s dive in.
Contents:
Different Kinds of Credit Scores
Understanding Good Credit Scores
What is the Minimum Credit Score Required for a Mortgage Loan
Determining the Credit Score Range for Purchasing a Car
Ways to Improve Your Credit Score
Joe's Reflections on Building Credit
Different Kinds of Credit Scores
Two different credit scoring models are commonly used: the FICO model and the Vantage model. It's essential to understand the differences and how they calculate your credit score.
FICO Credit Score
The FICO scoring model is the most commonly used. There are eight various FICO models, and your credit score will vary from one to another depending on your credit report. When you apply for credit, each type of lender will use a different FICO report. For example, if you apply for a mortgage, most likely, the lender will pull your FICO 5 credit report. But if you apply for a credit card, they will use your FICO 8 credit report.
Why So Many FICO Scores?
Each credit report has a different "weight" that evaluates the factors critical to the lender. Thus, the credit score's impact varies depending on the report's relevant aspects, such as mortgage, credit card, or auto history. You can check your scores for different FICO models at www.myfico.com.
Vantage Credit Score
The Vantage scoring model is a new rival to FICO scoring. The three main credit reporting agencies developed Vantage Score in competition with FICO. Although FICO currently dominates the lending sector, Vantage is gaining popularity in other fields, especially in personal loans and auto lending. One of the advantages is that you can access your credit reports free of charge through credit monitoring websites like Credit Karma.
Is the Vantage Score Accurate?
The Vantage score can provide a general idea of your credit score. However, since it's not widely used for lending purposes, it may not be accurate when it comes to actual lending scores. FICO is the most recognized scoring model and the most commonly used for lending purposes. Nonetheless, given the Vantage scoring model's growing popularity, it is likely it will become widely used in the lending sector in the next 5–10 years. The FICO scoring model may be outdated and not accurately represent your credit scores. Therefore, using the Vantage score to have an idea of your credit situation could be useful. Remember that credit reporting agencies have enormous data and the power to provide the best scoring data.
Understanding Good Credit Scores
Credit scores from both the FICO and Vantage models scale from 350 to 850, where 850 is the best score, and 350 is the worst. It is crucial to know where you stand when striving for the highest score possible. Here are some essential credit score ranges to keep in mind.
1. 620 or below
Having a score below 620 is considered bad credit. It implies that you may have adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, you should pay your bills on time and maintain ten active revolving accounts. Secured credit cards such as Credit Builder Card or OpenSky Credit Card can be used to improve your credit score. When you achieve a 620 credit score, you become eligible for an FHA home mortgage.
2. 640-680
With scores ranging from 640 to 680, you have a fair to good credit score. It indicates that you have established credit. However, you might have some negative marks or accounts on your credit, along with high balances on your credit cards. If you have just opened a new account and notice a temporary drop in your scores, do not worry, this is common.
3. 740+
If your credit score is over 740, it is considered "super-prime" and can offer you the most optimal interest rates for most loans. This score puts you in the top 20% of the US population. Keep up the excellent work by paying your accounts on time and staying current with your revolving credit card accounts. You're doing great!
What is the Minimum Credit Score Required for a Mortgage Loan?
In order to qualify for any type of mortgage loan, you need to meet certain requirements set by the lender. However, the prerequisites and criteria you need to satisfy may vary slightly based on the loan type you’re applying for. The three most common mortgage loan types available are conventional loans, FHA loans, and VA loans, which all have unique features and qualifications.
Conventional Loans
Conventional loans are a popular option that doesn't require you to maintain private mortgage insurance (PMI), which is a cost that's typically required for other loans. The credit score requirement for conventional loans is typically 640, while the maximum debt-to-income ratio can't exceed 43%. The interest rates are usually lower, and you may qualify for lower downpayment requirements.
FHA Loans
FHA loans are designed for borrowers with lower credit scores, with a score requirement between 580 and 619. However, you'll need to maintain PMI for at least 11 years, which can be an added expense to your monthly mortgage payments. The downpayment requirement starts at just 3.5%, with a maximum debt-to-income ratio of 50%. However, you may be facing higher interest rates on your loan.
VA Loans
VA loans are available for veterans, active-duty military personnel, and some surviving spouses, awarded based on their length of service. There is no credit score requirement for the VA loan, but previous defaulted loans and past-due debts owed to the government may affect your eligibility. VA loans typically offer the best interest rates, and you're not required to make a downpayment.
Determining the Credit Score Range for Purchasing a Car
When purchasing a car, your credit history is more important than your credit score in terms of qualifying for a loan. Your credit score does play a role in the interest rate you receive, but lenders primarily consider your credit histories to measure the risk of extending credit. A person who has defaulted on a prior auto loan or has been late on a current or previous payment poses a greater risk than someone with a clean credit history. Although some finance lenders will qualify people with poor credit or repossessions for a car loan, they will likely require high down payments and additional fees to the dealership as a risk mitigation technique. In most cases, the dealership must pay a fee to approve you for a loan, leading to a higher markup to cover the cost. To get the most out of buying a car, starting with equity or a down payment is critical.
The Credit Score Range for a New Vehicle
A perfect credit score does not guarantee a car loan approval as the lenders consider several factors. However, a credit score above 680 is an ideal range for purchasing a vehicle. Anything below this score may result in a higher interest rate due to the risk posed to the lender. The following example shows the effect of credit scores on the amount of interest paid:
1. Customers with a credit score of 720 or more pay an average of $5,500 in interest on a purchase.
2. Customers with a credit score of 680 or more pay an average of $6,600 in interest on a purchase.
3. Customers with a credit score of 650 or more pay an average of $8,100 in interest on a purchase.
4. Customers with a credit score of 615 or more pay an average of $10,200 in interest on a purchase.
5. Customers with a credit score of 580 or more pay an average of $13,900 in interest on a purchase.
6. Customers with a credit score of less than 580 pay an average of $15,300 in interest on a purchase.
The data shows that a higher credit score leads to less interest paid and a better outcome for your credit score overall.
Ways to Improve Your Credit Score
There are several things you can do to increase your credit score, and it doesn't have to be an arduous task. It is important to understand that building a strong credit rating takes time and requires patience. Impatience may lead to irrational decisions that will worsen your credit problems.
Here are some ways to improve your credit score effortlessly:
1. Open 3-5 Revolving Credit accounts (Credit Cards)
Revolving credit is an excellent way to help optimize your credit scores. It is particularly beneficial for individuals with limited credit or those looking to rebuild their credit. Obtaining a large loan to build credit requires a lot of work, but opening a secured credit card will give you a better chance of approval. Secured credit cards such as Open Sky or Credit Builder Card focus on your payment ability rather than your credit score. Revolving credit makes up 30-35% of your overall credit score, and it is the best alternative to increase your credit score quickly. It may take 2-4 months to reflect in your credit scores, but ensure you keep your balance at $5-10 and pay on time. Be cautious and restrict the usage of your card to small purchases only.
2. Raise your Limits!
You can promptly request a credit limit increase from your credit card company if you have active revolving credit cards. It is a way to increase your total credit limits and reduce your credit utilization percentage. Your credit scores may get a hit if your credit card balances exceed 30% of your total limits. To help keep your utilization percentage low, you can increase your credit limits.
Procedures for requesting a credit limit increase vary by credit card companies. You can usually request it online or by calling the company. If you're unsure, call your credit card company and request a “Credit Limit Increase.†They usually want to see 7-15 months of excellent payment history on a credit card before agreeing to increase the limit.
3. Pay down your balances!
Maintaining low balances on your credit cards is critical. While you're not required to use your credit cards each month, using them for small purchases is better. When paying your bill monthly, leave about $1-5 balance on your credit card. In case you have high balances and cannot pay them off immediately, plan to pay a percentage of your paycheck each month to settle the credit card balance. Avoid running up your balances again after paying them down. Remember, your credit card spending habits will significantly impact your credit score. Thus, it is essential to limit credit card usage. Additionally, credit card rates are high, and paying only interest does not reduce the principal amount.
Joe's Reflections on Building Credit
Let's face it, many of us have experienced the frustration of having a poor credit rating. However, if you're willing to dedicate time and effort to improving your credit rating, you'll notice significant improvements pretty quickly. Unfortunately, many people with low credit scores feel trapped in a never-ending cycle of poor credit and feel overwhelmed at the thought of rebuilding their credit. But building a great credit history requires work, and with commitment and discipline, anyone can achieve it. Begin by setting up a budget and identifying any problematic spending patterns; this is a direct path toward an improved credit score. This article provides valuable insights into establishing good credit. If you need assistance with credit repair or guidance in improving your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com.
Here are some crucial pointers:
1. Take your credit situation seriously
2. Work on yourself and your credit
3. See changes in your score quickly
4. Don't get trapped in a cycle of poor credit
5. Develop a great credit score with a lot of work
6. Prioritize your credit and spending habits
7. Creating a budget is the first step
8. Reach out for professional help if needed