It may come as a surprise, but did you know that there are actually 30 different levels of credit scores? It's true! However, many individuals searching for information on credit scores may find themselves overwhelmed by the sheer volume of conflicting advice and opinions found online. Oftentimes, this can lead to confusion and even misinformation which ultimately leads them down a dead-end path. My name is Joe Mahlow and I've been working in the finance and credit repair industry for more than fifteen years. My objective is simple - to provide you with honest and straightforward advice on various topics, including credit scores. Over the years, I've helped over 20,000 clients improve their credit scores and today, I'm here to share that knowledge with you. So, let's get started!
Contents:
Different Credit Scoring Models to Know
What is Considered a Good Credit Score?
What is a Suitable Credit Score to Qualify for a Mortgage?
Determining the Ideal Credit Score to Buy a Car
Tips on Improving Your Credit Score
Insights from Joe: How You Can Rework Your Credit Situations
Different Credit Scoring Models to Know
When it comes to credit scores, there are two primary models to be aware of: the FICO model and the Vantage model. Knowing the differences between these models is important in understanding how your credit score is calculated.
FICO Credit Score
The FICO credit scoring model is widely used and has eight different versions, ranging from FICO 2 to FICO 10. It's essential to know that lenders will use different versions of the model, depending on the type of loan you are seeking. For example, a mortgage lender would likely pull your FICO 5 credit report, while a credit card company would use FICO 8. Each version of the FICO model weighs different factors more heavily than others, resulting in different scores based on your credit history.
Vantage Credit Score
The three major credit reporting agencies developed the Vantage Score as an alternative to the FICO model. While not as widely used for lending purposes, Vantage is gaining popularity in certain sectors, such as personal loans and auto lending. Credit monitoring websites often provide Vantage Scores for free.
Accuracy of the Vantage Score
While the Vantage Score can provide a general idea of your creditworthiness, it isn't as accurate as the FICO model for lending purposes. Lenders primarily use FICO scores, so a Vantage Score may not accurately reflect your creditworthiness when applying for a loan. However, as the Vantage Score evolves and becomes more widely adopted, it may become more relevant in the future. For now, it's best to use the Vantage Score as a general indication of your credit score.
What is Considered a Good Credit Score?
Both the FICO and Vantage scores range from 350 to 850—the lower the score is, the worse the credit. A higher score equates to better financial health. To ensure that your credit score remains as high as possible, it's crucial to be aware of where you stand during the process of building and maintaining it. Below are some essential score thresholds and what they indicate.
620 or Below:
This score is considered bad credit, indicating that you may have some negative credit history, high-balance credit card accounts, or no credit cards at all. To boost your credit scores, ensure that you make timely payments and have ten active revolving credit accounts open. Consider getting a secured credit card like the Credit Builder Card or OpenSky Credit Card, which can help you build up your credit. Once you reach 620, you will start qualifying for an FHA home mortgage.
640-680:
This score is considered fair for good credit. It means you have established credit; however, you may have some derogatory marks, high credit balances, or newly opened accounts, which may drop your score temporarily. Over time, your scores will rise again.
740+:
Anything above 740 indicates "super-prime" credit and offers the best interest rates for most loans. Only 20% of the US population falls into this category. If you have a score of 740 or above, congratulations, and keep up the good work by paying your accounts on time and keeping revolving accounts paid.
What is a Suitable Credit Score to Qualify for a Mortgage?
To determine the ideal credit score for a mortgage, you should first evaluate the type of mortgage loan you intend to apply for. As a result of government regulations and support, most mortgage loans have similar or different requirements and guidelines. Generally, there are three main types of mortgage loans: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most popular with the best savings loan option, considered the best after VA loans. With conventional loans, private mortgage insurance (PMI) is not mandatory, which is advantageous as it's an extra cost that would require an increase in your downpayment or monthly payment. PMI protects the lender if payments are not made. The credit score requirement for conventional loans is 640 with a debt-to-debt ratio that should not exceed 43%. Moreover, conventional loans require a lower downpayment than other loans with better interest rates.
FHA Loan
The FHA mortgage loan option is excellent for individuals with lower credit scores that typically range between 580 and 619. Remember that different lenders have varying loan programs, so it's crucial to shop around for the best financial option. PMI is a mandatory requirement for FHA loans for at least 11 years, leading to extra costs, especially when on a budget. Besides, the debt-to-income limit for FHA loans can go up to 50%, allowing more home purchases with lower income. Lastly, the downpayment requirements for an FHA loan are only 3.5% of the purchase price, which results in less out of pocket cash than a conventional loan. On the other hand, the interest rates are generally higher.
VA Loan
When pre-qualifying for a VA loan, no specific credit score requirement exists. Instead, the lender checks for any past-due debts or previous defaulted loans you may have. Individuals who served in the US military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or have a deceased spouse who served in the military qualify for VA loan. VA Loans generally offer the best interest rates and usually do not require a downpayment making it an ideal home loan option for veterans.
Determining the Ideal Credit Score to Buy a Car
It's a common misconception that a high credit score is the only factor to consider when applying for a car loan - your credit history is equally important. While a good credit score is beneficial, it has a limited impact on your interest rate qualification. When applying for a car loan, lenders examine your credit histories to determine the level of risk involved in extending credit. For instance, if you've previously defaulted on a car loan or currently have late payments, you may face challenges in obtaining a loan compared to someone with a clean credit history. Although some lenders specialize in bad credit vehicles finance, approval will come with conditions such as a high down payment and additional dealership fees. For dealers, these fees help lower the risk of supplying a loan to an individual with a high risk of non-payment. It's crucial to have equity or a down payment while seeking credit to gain the most leverage when purchasing a vehicle.
Credit Score Range for Buying a New Car
Even though there is no particular score for loan approval, a credit score above 680 is ideal. However, if you have a score of less than 680, you may be charged higher interest rates due to the risk you pose to the lender. Your credit score affects the interest rates you pay, as illustrated in this example: a credit score of 720 and above will pay an average of $5,500 in interest, while a score of 615 or less will pay an average of $10,200 in interest. This suggests that the higher your credit score, the lower the interest you'll pay, making a significant impact on your credit score's overall health.
Tips on Improving Your Credit Score
Improving your credit score requires time and patience. You cannot expect instant results, and impulsive decisions can make matters worse. Here are some actions you can take to boost your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit, like credit cards, is an ideal way to build good credit scores. To increase your chance of approval, begin with secured cards such as OpenSky or Credit Builder Card. Revolving credit makes up 30-35% of your overall credit score, so make small but timely payments and keep the balance at $5-10.
2. Raise your credit limits
Request a credit limit increase through your online portal or by calling your credit card issuer. With a higher limit, you can decrease your credit utilization percentage and your overall credit limit.
3. Pay down your balances
Leave a small balance of $1-5 on your credit cards each month to maintain active accounts. If you have high balances, make a game plan to pay them down and limit your credit card usage. High-interest rates can quickly escalate your debt, so paying your balances down regularly is crucial.
Remember to address your credit score patiently and responsibly, and you will see positive results.
Insights from Joe: How You Can Rework Your Credit Situations
Well, let's admit it- we have all had situations where our credit wasn't as stunning as we hoped it would be. But if you are committed to turning your credit situation around, you'll quickly notice remarkable changes in your credit score. Most often, people with poor credit continue living with it as if it's the norm and feel helpless about improving their score. However, it takes a great deal of effort and dedication to build a solid credit score, and those who take the initiative to improve their creditworthiness and focus on their spending habits are more likely to succeed. Start by outlining a budget and working to rectify any harmful spending practices you've developed, and this will directly impact your credit score. This piece aims to provide you with insights on how to better understand credit and take necessary steps towards credit repair. For guidance and assistance on credit repair, visit us today at www.asapcreditrepairusa.com.