It's a little-known fact that credit scores can have up to 30 different levels. Many people seeking to improve their score may find conflicting information on the web, which can be confusing and frustrating. My name is Joe Mahlow, and I've been involved in financial literacy and credit repair for the past 15 years. My purpose is to provide you with straightforward and reliable advice on important topics such as credit scores. Having assisted over 20,000 clients in raising their credit scores, I'm confident that I can equip you with the necessary information to do the same. So, let's begin.
Contents:
What are the Types of Credit Scores?
Understanding a Good Credit Score
What Credit Score Do I Need to Buy a House?
What is the Ideal Credit Score for Buying a Car?
Tips for Boosting Your Credit Score
Tips from Joe for Improving Your Credit Score
What are the Types of Credit Scores?
Understanding the two main credit scoring models, FICO and Vantage, is critical. These models differ in calculating credit scores, making it important to comprehend their similarities and differences.
FICO Credit Score
As the most commonly used credit scoring model, FICO comes in eight models ranging from FICO 2 to FICO 10, and each one gives a different credit score depending on the credit report. Creditors pull different FICO reports depending on the type of loan, such as a FICO 5 report for a mortgage and a FICO 8 report for a credit card. Every FICO report carries a different "weight," meaning the most critical factors to creditors weigh more than others. For example, previous mortgage history is more critical for FICO 5 reports, whereas previous credit card history is more critical for FICO 8 reports.
Why are there Many FICO Scores?
The reason for having many FICO scores is that each credit report has a given weight. Creditors examine the factors that are critical to them, giving them a significant impact on a credit score than less important ones. FICO 5 report, for mortgage loans, weighs heavily on previous mortgage history, likewise, FICO 8 report, primarily used by credit card companies, places more weight on a borrower's previous credit card history.
To track different FICO scores, go to myfico.com and create an account.
Vantage Credit Score
Vantage came up with a new credit scoring model that competes with the FICO scoring model. Although Vantage is new in the market, it has become a preferred scoring model for personal loans and auto lending, among other sectors. Some credit monitoring websites use Vantage to provide free credit reports.
Accuracy of Vantage Score
The Vantage score is accurate, but its accuracy is subject to context. It's not widely recognized for lending purposes like FICO, so not accurate when it comes to the actual lending score. However, it gives a 'general idea' of your FICO score. The FICO scoring model may become outdated soon, making the Vantage Model gain popularity. Credit reporting agencies have the most data, making them the best to provide accurate scoring models.
Understanding a Good Credit Score
Both the FICO and Vantage models range from 350 to 850, with 350 being the worst credit score and 850 being the highest score. Achieving the highest scores requires understanding where you stand in terms of creditworthiness throughout your credit-building journey. Here are some crucial score thresholds:
1. 620 or below
This is considered bad credit, and it usually means you have a poor credit history, high-balance credit card accounts, or no credit cards at all. Ten active revolving credit accounts and timely payments are critical to improving your scores. Secured credit cards, such as the Credit Builder Card or OpenSky Credit Card, can also help you build credit. Once your credit reaches the 620 range, you can start qualifying for an FHA mortgage.
2. 640-680
This is considered fair for good credit. Scores in this range typically indicate that you have established credit, but you may have some derogatory marks or accounts on your credit, as well as high balances on credit cards that you'll need to pay down. Newly opened accounts can also temporarily lower your scores. If your score falls within this range and you've recently opened an account, don't worry; this drop is temporary, and your scores will rise.
3. 740+
Any credit score over 740 is considered "super-prime" and provides the best interest rates for most loans. Less than 20% of people in the US population have a score above 740. If you belong to this group, congratulations! You have a great credit score. Always pay your bills on time and maintain your revolving credit card accounts.
What Credit Score Do I Need to Buy a House?
Generally speaking, the credit score you need to buy a house depends on what type of mortgage loan you are considering. Federal regulation and government backing result in similar, if not different, requirements and guidelines for most mortgage loans. Three of the most common mortgage loan types are conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the most commonly used loans and often the best option for saving outside of the VA loan. This is because they do not require you to maintain private mortgage insurance (PMI), which can increase your downpayment or monthly payment. PMI protects the lender in case you stop making payments on your loan. Moreover, conventional loans usually have lower downpayment requirements and better interest rates than other mortgage loans. A credit score of at least 640 and a debt-to-debt ratio no higher than 43% is typical for this type of loan.
FHA Loan
The FHA mortgage loan is designed for those with lower credit scores, typically between 580 and 619. Since all loan programs are different, it is wise to shop around for different lenders. It's possible to get the best financial option from one lender, even if your credit score does not meet their requirements. An FHA loan requires you to keep PMI for at least 11 years, which will increase your mortgage payments. Additionally, this loan typically has a higher debt-to-income limit of up to 50%, and downpayment requirements can be as low as 3.5%. However, this loan generally comes with a higher interest rate.
VA Loan
The VA loan does not technically require a credit score. However, they thoroughly examine your past defaulted loans and any government-owned past-due debts when pre-qualifying you. To be eligible, you must have either 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 be a surviving spouse of someone who died during active duty. Typically, the VA loan has the best interest rates available and does not require a down payment. This loan is a perfect way to give back to our veterans.
What is the Ideal Credit Score for Buying a Car?
When in the market for a car, your credit score is important, but it's not the only deciding factor. Your credit history plays a significant role in determining your creditworthiness, which goes hand in hand with the loan interest rate. Your past and present credit behavior will affect the risk assessment for lending you money. Individuals who default or have late payments on their previous or current car loans may get fewer loan approvals than those with an impeccable record. However, some bad credit or subprime lenders may approve anyone for a car loan, albeit with stricter criteria, such as a higher down payment and increased fees. Dealerships could also charge a fee to offset the risk of lending, causing them to dictate which vehicle you can afford. Additionally, having equity and a sizeable downpayment can give you a better bargaining position.
In terms of the credit score range for a new vehicle, a score over 680 is ideal, although multiple factors affect loan approval. Lenders may charge higher interest rates for scores under 680 because of the increased risk. The difference in interest rates becomes more apparent comparing credit scores. For instance, someone with a 720 or higher score would pay around $5,500 in loan interest, while someone with a 680 credit score would pay $6,600. On the other hand, a 580 score would amount to $13,900 in interest on a loan. As such, the higher your credit score, the easier it is to get better interest rates, resulting in a lower overall cost.
Tips for Boosting Your Credit Score
Achieving a good credit score takes time and patience, but there are steps you can take today to improve it effortlessly. It's crucial to avoid making hasty decisions with your credit because impulsive behavior can lead to bigger problems. Here are some things you can do right now to raise your credit score:
1. Open 3-5 revolving credit accounts
Revolving credit, particularly for those with limited credit or those rebuilding their credit, is an excellent way to improve your scores. Instead of trying for a large loan, revolving credit cards can increase your chances of approval. Start with a secured credit card that doesn't focus on your credit score, such as OpenSky or Credit Builder Card, and use it only for small purchases like gas or groceries. Make sure you pay the balance on time and keep it at $5–$10 each time you make a payment.
2. Increase your credit limits
Requesting a credit limit increase for your active revolving credit accounts can quickly increase the overall credit limit and lower utilization percentages. Each credit card company has different processes, so call and ask to have a "Credit Limit Increase." Before agreeing to increase your limit, the credit team requires 7-15 months of excellent payment history on one card.
3. Pay down your balances
Maintaining a low balance and keeping it close to zero is crucial. Use your credit card for small purchases and leave about $1–$5 balance on it when it comes time to pay your bill each month. If you are struggling with outstanding balances and cannot pay your credit cards off, make a plan to take a percentage of your paycheck each month to pay your balances down until they're zero. Do not continue using your cards once you have paid them down. Remember, your credit card habits play a significant role in your overall credit score, and high-interest rates can make it difficult to pay down the principal.
Tips from Joe for Improving Your Credit Score
Let's face it, almost everyone has had a less-than-stellar credit score at some point in their lives. But don't let that discourage you. If you're serious about improving your credit situation, there are steps you can take to see significant changes in your score relatively quickly. It's all too easy to become trapped in a cycle of poor credit, but with dedication and effort, you can break free. Building a high credit score takes time and hard work, but those who are committed to improving their financial health will ultimately succeed. Start by creating a budget that prioritizes your debt payments, and consider working on any bad spending habits that may have contributed to your credit issues. This will have a direct impact on your credit score. For more guidance and assistance with credit repair, contact my office at www.asapcreditrepairusa.com.