Were you aware that there are actually thirty different levels of credit scores? Despite being a critical aspect of personal finance, many people remain unaware of this fact and often turn to Google for answers. Unfortunately, the vast array of information available can be not only overwhelming but also potentially misleading. As someone with over fifteen years of experience in both financial literacy and credit repair, my name is Joe Mahlow and my aim is to provide you with honest and straightforward advice on various topics, starting with credit scores. I have already helped more than twenty thousand clients enhance their credit scores and with this knowledge, I hope to enable you to do the same. So let's delve into the details.
Contents:
What Are the Different Types of Credit Scores and How Do They Work?
Understanding What Constitutes a Good Credit Score
What is a Suitable Credit Score to Buy a Home?
Credit Score and its Importance in Buying a Car
Tips to Improve Your Credit Score
Final Thoughts from Joe for Improving Your Credit Score
What Are the Different Types of Credit Scores and How Do They Work?
Knowing the difference between credit scoring models is essential as not all lenders use the same scoring system. The two most widely recognized scoring models are the FICO and Vantage models. We will explain how they work and what distinguishes them from one another:
1. FICO Credit Score
The FICO credit score model is the most widely used by lenders. However, there are eight different FICO models, from FICO 2 to FICO 10, which may give you a different credit score, depending on the lender and its credit report. Each FICO model calculates scores differently according to the critical credit factors relevant to the lender. For example, a mortgage lender would most likely pull your FICO 5 report, which values previous mortgage history. In contrast, a credit card company would pull your FICO 8 report, which prioritizes your credit card history.
2. Vantage Credit Score
The Vantage score model was created by the three major credit reporting agencies (Equifax, Experian, and TransUnion) for consumer educational purposes. Vantage is newer than FICO, but it is gaining popularity in sectors such as personal loans and auto lending, where it is being used as a free credit score tool. However, most lenders still use the FICO scoring model.
Is the Vantage Score Accurate?
Although Vantage is accurate in providing a general idea of your FICO score, it is not currently widely used for lending purposes. However, Vantage may become more widespread in the future due to its ability to adapt to changing credit industry standards. Nevertheless, credit reporting agencies possess the most extensive customer data available, and they design their scoring models according to the requirements of various industries.
If you want to have an idea of your different FICO scores, you can visit www.myfico.com and sign up for an account.
Understanding What Constitutes a Good Credit Score
A good credit score is essential in achieving financial goals. Credit scores are measured using the FICO and Vantage scoring models, which range from 350 to 850 range. A score of 350 is considered the worst, and 850 is the best. Throughout your credit-building journey, it's crucial to keep track of your scores. Here are some vital score thresholds to aim for:
620 or below
Considered as bad credit, this score range indicates adverse credit history, high-balance credit card accounts, or a lack of credit card usage. Building your credit score can be achieved by making timely payments and maintaining ten active revolving credit accounts. A good starting point is the Credit Builder Card or the OpenSky Credit Card, both of which are secured credit cards to help build your credit. A score of 620 and above can help you qualify for an FHA home mortgage.
640-680
This range is considered fair for good credit. It indicates that you have established credit, but you may have derogatory marks or accounts on your credit. You may also have high balances on your credit cards, which you will need to pay down. Score fluctuations may occur when newly opened accounts may drop your score temporarily. Relax; it's a temporary drop, and your score will return to the norm.
740+
Any score higher than 740 is considered "super-prime" and the best for most loans, allowing for the absolute best interest rates. Kudos if you have a score above 740; you are in the top 20% of the US population. To maintain your score, make timely payments, and pay off any revolving credit card accounts. Keep up the great work.
What is a Suitable Credit Score to Buy a Home?
Determining the appropriate credit score to qualify for a mortgage loan depends on the type of loan you are interested in. Although the regulations and criteria for most mortgage loans are similar due to federal laws and government support, they may not necessarily be the same. There are three main categories of mortgage loans namely FHA loans, VA loans, and conventional loans.
Conventional Loans
Conventional loans are the most prevalent type of loan and typically the best loan option after the VA loan. Private mortgage insurance (PMI) is not required for conventional loans, which can be an additional expense that increases your downpayment or monthly payment. PMI safeguards the lender in the event that you fail to make your loan payments. Traditional mortgage loans typically have a credit score requirement of at least 640 and a maximum debt-to-income ratio of 43%.
FHA Loan
FHA mortgage loans are for individual borrowers with lower credit scores typically between 580 and 619. Bear in mind that every loan program has distinct requirements, so if your credit score falls within the accepted threshold, look for various lenders to find the best loan option for you. FHA loans require you to hold PMI for at least 11 years, which is an additional charge that you should consider, especially if you're living on a tight budget. This loan has a higher debt-to-income limit of 50%, enabling you to acquire more homes than a conventional loan would if you have a lower income. Finally, the minimum downpayment requirement for an FHA loan is 3.5% of the purchase, which allows you to obtain a mortgage with less money out of pocket than a conventional loan, although you will typically have a higher interest rate.
VA Loan
There is no specific credit score requirement for VA loans, but they consider previous defaulted loans and any past-due government debts when pre-qualifying you. You must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served in the National Guard for six years, or lost your military spouse during active duty to qualify for this loan. The VA loan generally has the most favorable interest rates, and a down payment is usually not required. I appreciate the VA Loan because it is a great way to support our veterans.
Credit Score and its Importance in Buying a Car
In buying a car, a person's credit history plays a crucial role in determining loan approval rather than just the credit score alone. Although a person's credit score is important in getting an auto loan, it only affects the interest rate that they may qualify for. When one applies for a car loan, lenders examine their previous and present credit histories to determine their risk level in extending credit. Thus, not only the credit score but also the credit history has a significant impact on the eligibility for an auto loan. Individuals who have had previous repossessions or have been late on a previous auto loan will have more challenges in getting loan approval than those who have not. Moreover, some lenders may qualify almost anyone for a car loan, even those with poor credit scores. Still, they may require specific criteria to be met, such as a higher down payment and additional fees to cover the risk involved. Dealerships may also charge additional fees to approve individuals with bad credit for a loan. Thus, having equity or a substantial down payment may provide more leverage when buying a vehicle on credit.
The Ideal Credit Score Range for a New Vehicle
Having a credit score of over 680 is ideal when buying a new vehicle. While there is no exact credit score that will guarantee loan approval, having a credit score below this number may increase the interest rates due to the risk the borrower poses to the lender. The data listed below show how much interest one can pay based on their credit score:
1. Someone with a credit score of 720 or higher will pay approximately $5,500 in interest on a loan.
2. Someone with a credit score of 680 or higher will pay approximately $6,600 in interest on a loan.
3. Someone with a credit score of 650 or higher will pay approximately $8,100 in interest on a loan.
4. Someone with a credit score of 615 or higher will pay approximately $10,200 in interest on a loan.
5. Someone with a credit score of 580 or higher will pay approximately $13,900 in interest on a loan.
6. Someone with a credit score of 580 or lower will pay approximately $15,300 in interest on a loan.
Notably, the higher the credit score, the less interest one will pay, affecting their overall credit score.
Tips to Improve Your Credit Score
Achieving a good credit score is a gradual process that requires patience and informed decisions. Rushing or making impulsive decisions can harm your credit score even further. Here are some things you can do to help improve your credit score right now:
1. Open 3-5 Revolving Credit Accounts:
Applying for a secured credit card like Open Sky or Credit Builder Card is a great option for those with limited credit or those trying to rebuild their credit. Revolving credit makes up 30-35% of your credit score, so it’s the best way to build credit quickly. It can take a couple of months for the increases to show on your credit score, but it’s crucial to pay the balance on time and keep it between $5-$10. Limit the usage of the card to smaller purchases.
2. Raise Your Limits:
You can request a credit limit increase for your active revolving credit card accounts. Credit card balances exceeding 30% of your overall limits can hurt your credit score, so increasing your credit limits can lower your credit utilization percentage and increase your overall credit limits.
3. Pay Down Your Balances:
Keeping your balance low and closing to zero is essential. Use your credit cards for smaller purchases and leave a balance of $1-$5 each month when paying your bill. If you have high balances and can’t afford to pay them off, make a game plan to pay down your credit card, and ultimately stop using them. Limit your credit card usage since it will determine your overall credit score. Credit card rates are relatively high, and most payments will go towards interest and not principal.
Final Thoughts from Joe for Improving Your Credit Score
We've all been in a situation where our credit score wasn't quite up to par. However, if you are serious about improving your credit, there are steps you can take to see significant changes in a short amount of time. Many people with poor credit feel like they'll never be able to improve it, but with dedication and hard work, it is possible. You can start by creating a budget and working on improving any bad spending habits. This will have a direct impact on your credit score, which can take time but is worth the effort. Our article can provide you with a better understanding of credit in general. If you need additional support or credit repair, don't hesitate to reach out to our office at www.asapcreditrepairusa.com.