It's surprising to learn that credit scores have as many as 30 different levels. Many individuals are unaware of this fact, which can lead to confusion when searching for the best credit score. The abundance of information available online can be both overwhelming and misleading at times, causing frustration and uncertainty. As a seasoned professional in the field of financial literacy and credit repair, my name is Joe Mahlow, and my objective is to provide you with honest advice on various topics, such as credit scores. Over the past fifteen years, I've aided more than twenty thousand clients in optimizing their credit scores, and I'm eager to share my knowledge with you. So, without further ado, let's dive in!
Contents:
Different Kinds of Credit Scores
What is a Good Credit Score?
What is a suitable credit score to secure a mortgage?
Ideal Credit Score for Car Buying
Tips for Improving Your Credit Score
Insights by Joe on Credit Improvement
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Different Kinds of Credit Scores
What is a Good Credit Score?
What is a suitable credit score to secure a mortgage?
Ideal Credit Score for Car Buying
Tips for Improving Your Credit Score
Insights by Joe on Credit Improvement
Different Kinds of Credit Scores
You will become familiar with two credit scoring models called the FICO model and the Vantage model, both of which are important to understand. Each model calculates a credit score differently, and it is crucial to know the differences.
FICO Credit Score
The FICO credit scoring model is the most widely used scoring model. Eight different FICO models exist, from FICO 2 to FICO 10, and each model varies depending on your credit report. Each lender pulls a different FICO report, so, for example, when you apply for a home, your mortgage lender will likely pull your FICO 5 credit report, whereas if you applied for a credit card, your FICO 8 credit report would get pulled.
Why Many FICO Scores Exist
Each credit report has a different "weight," which means that factors that the lender considers most important will have a more significant impact on a credit score than less critical factors. A FICO 5 mortgage report focuses heavily on previous mortgage history, whereas a FICO 8 credit report focuses more on your previous credit card history. Auto lenders typically pull FICO-2 reports, and again, previous auto history has a significant impact on the score.
If you want to see your various FICO scores, visit www.myfico.com, sign up for an account, and view your different credit scores.
Vantage Credit Score
The three credit reporting agencies created the Vantage Score to compete with FICO. This newer model has been gaining popularity in some sectors, such as personal loans and auto lending. Credit monitoring websites frequently use Vantage to give free credit reports.
Is the Vantage Score Accurate?
The Vantage Score is accurate, but its accuracy depends on the context. Since it is not widely used for lending purposes, it will not be as accurate as your actual lending score. However, it can give you a general idea of your FICO score. Vantage's accuracy varies since FICO is the most recognized scoring model. The Vantage scoring model can provide a clear representation of your credit scores compared to FICO.
Lenders may widely use the Vantage scoring model in the near future because it provides the best scoring model based on today's standards. The FICO scoring model is outdated and doesn't provide a clear representation of credit scores. Credit reporting agencies have access to the most significant data. If they have the data, they can provide the best scoring data, period.
What is a Good Credit Score?
Credit scores for both FICO and Vantage models range from 350 to 850. A score of 350 is the worst credit score, while a score of 850 is the best. Knowing where you stand in terms of building your scores is essential for setting your goal to achieve the highest number. Below are some vital credit score thresholds that are necessary for achieving it.
1. 620 or below: This is considered bad credit, and if you fall below this threshold, you most likely have adverse credit history. You may also have high-balance credit card accounts or no credit cards at all. To improve your credit scores, it's best to make payments on time and have ten active revolving credit accounts open. You can also apply for Credit Builder Card or OpenSky Credit Card, which are secured credit cards that help build credit. Once you hit the 620 credit score range, you'll start to qualify for an FHA home mortgage.
2. 640-680: This is considered your fair share for good credit. Having scores in this range indicates that you've established credit, but you may also have some derogatory marks or accounts on your credit. Additionally, you may have high balances on your credit cards that you will need to pay off. Another common occurrence is the opening of newly opened accounts which could cause a temporary drop in your scores. However, don’t panic if this is the case; your scores will return.
3. 740+: Any credit score above 740 is considered "super-prime" and will grant you the absolute best interest rates for most loans. Congratulations are in order if your credit score is above 740 as you are part of the 20% of the US population with such a score. To maintain this score, always pay your accounts on time and keep your revolving credit card accounts paid. Do this, and you'll be in great financial shape!
What is a suitable credit score to secure a mortgage?
The answer to this inquiry depends on the category of mortgage loan that is being applied for. Federal regulation and government endorsements cause most mortgage loans to have similar - if not identical - requirements and guidelines. There are three customary mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most prevalent type of loan and are usually the finest "savings" loan alternative, besides the VA loan. Conventional loans do not necessitate the maintenance of private mortgage insurance (PMI), which can potentially increase your downpayment or monthly payment. PMI defends the financier if you stop paying your loan. Conventional loans usually have lower downpayment requirements and better interest rates than other mortgage loans. Conventional mortgage loans require a minimum typical credit score of 640 and a debt-to-debt ratio no higher than 43%.
FHA Loan
The FHA mortgage loan has fewer credit score requirements, usually between 580 and 619. Keep in mind that all loan programs vary, so if your credit score fits the limits, explore different lenders to find the best financial option for you. FHA loans necessitate maintaining PMI for a minimum or 11 years, which can be an additional cost to your mortgage and needs careful consideration, predominantly if you have budget constraints. This loan typically allows a higher debt-to-income limit of up to 50%, enabling you to buy more homes than with a conventional loan if you have a lower income. Lastly, FHA loans require as little as 3.5% downpayment, giving you the chance to secure a mortgage with fewer expenses than a conventional loan, though the interest rates may indeed be higher.
VA Loan
No conventional credit score requirement exists, but VA loans scrutinize previous defaulted loans and any previous government debts before pre-qualifying you. You must have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or be the spouse of a military member who passed away during active duty. VA loans typically offer the best interest rates, and they generally do not require a down payment. The VA loan is the best option for veterans, offering great benefits to those who have served and their families.
Ideal Credit Score for Car Buying
When it comes to purchasing a vehicle, the major factor in determining eligibility is not merely the credit score, but the credit history. Although having a good credit score is important, its impact on the interest rate you qualify for is less. Creditors assess your past and present credit histories to quantify the risk associated with loaning money, particularly if you have credit issues. A car buyer with previous or current auto loan defaults or repossession will find it more challenging to obtain loan approval than someone without these issues. The riskiest creditors will grant auto loans to anyone, even those with prior repossession records, but with caveats such as requiring a higher down payment and additional fees paid to the dealership to extend the loan. To reduce the risk of loan default, the dealership pays a fee to approve loan applications. If you have poor credit and have shopped for a car at a dealership, you may have experienced this, where the vehicle with a higher markup can earn you approval for the loan. To gain more leverage when purchasing a vehicle through credit, you must have equity or a downpayment.
Credit Score Range for New Vehicles
While there is no specific credit score that guarantees loan approval, possessing a credit score over 680 is recommended. Any score below 680 increases the interest rate because of the lender's perception of credit risk. The amount of interest paid on the loan depends mainly on the credit score. The higher the credit score, the less you pay in interest rates. A borrower with a credit score of 720 and above pays, on average, $5,500 in loan interest, while someone with a credit score of 580 pays, on average, $15,300 in loan interest. The interest you pay on a loan affects the overall credit score.
Tips for Improving Your Credit Score
Improving your credit score can be accomplished with some simple steps that don't require much effort. However, it's essential to remember that building a good credit score takes time and doesn't happen overnight. Patience is crucial to avoid making irrational decisions with your credit, which can make your problems worse.
Here are some things you can do to raise your credit score:
- Open 3-5 revolving credit accounts (credit cards): Revolving credit is one of the best options to help maximize your credit scores. You can start with a secured credit card from companies like Open Sky or Credit Builder Card, focusing on your ability to pay the card on time. Revolving credit accounts make up 30-35% of your overall credit score and can help build scores quickly. Pay your balance on time and limit your usage to small purchases only.
- Raise your limits: You can request a credit limit increase for your credit cards to increase your overall credit limits and lower your utilization percentage. Call your credit card company and request a "Credit Limit Increase" or do it through your online portal. They typically want to see a few months of excellent payment history before agreeing to increase your limit.
- Pay down your balances: Keeping your balance low is critical to improving your credit score. Leave about $1-$5 balance on your credit cards and use them for small purchases only. If you have high balances, make a game plan to pay your credit cards down and ultimately stop using them.
Remember, limiting your credit card usage and paying your bills on time are crucial to improving your credit score.
Insights by Joe on Credit Improvement
Dealing with a poor credit history is something we’ve all experienced at one point in our lives. However, if you’re determined to improve your credit situation, you could see a significant boost to your credit score in a short time with the right approach. Many individuals with bad credit end up trapped in a vicious cycle, believing that their credit will never improve. But, achieving a great credit score requires effort and commitment. Those willing to prioritize their credit standing and address their spending habits can achieve success. To get started, create a budget and work on correcting any poor spending practices. A positive financial behavior will positively impact your credit score. This guide aims to deepen your understanding of credit improvement. If you need assistance with repairing your credit score, don’t hesitate to contact my office today at www.asapcreditrepairusa.com.
Key points:
- We have all struggled with poor credit at some point.
- Improving your credit requires effort and commitment.
- To achieve a higher credit score, prioritize your credit and address your spending habits.
- Developing positive financial habits will impact your credit score positively.