It's fascinating to learn that you might have up to 30 levels of credit scores! Unfortunately, the information you find on Google when searching for the best credit score can result in confusion and misleading answers. You may end up going down a dark path that doesn't help your financial situation. But, I'm here to assist you! My name is Joe Mahlow, and I've been helping people understand financial literacy and repair their credit scores for over fifteen years. My aim is to give you some raw advice regarding various topics, including credit scores. Having assisted over twenty thousand clients to improve their credit scores, I trust that I can provide you with the necessary information to achieve the same goal! Let's dive right in.
Contents:
Types of Credit Scores and How They are Calculated
Determining a Good Credit Score
Minimum Credit Score Required to Buy a House
Credit History - A Key Factor in Car Purchases
Tips for Improving your Credit Score
Final Thoughts from Joe to Improve Your Credit Score
Types of Credit Scores and How They are Calculated
Credit scores are crucial aspects of your ability to obtain loans and credit. The two most common scoring models are the FICO and Vantage models. Understanding the differences between these two scoring models is critical to determining your credit score.
FICO Credit Score
The FICO model is currently the most widely used scoring model and has eight different FICO models ranging from FICO 2 to FICO 10. Different lenders will pull different FICO reports based on the type of credit you are applying for. For example, if you are applying for a home loan, your lender will likely pull FICO 5, whereas if you are applying for a credit card, they will likely pull FICO 8.
The reason there are so many FICO scores is that each one is weighted differently based on the critical factors for the specific lender. For example, a FICO 5 mortgage report will weigh heavily on your previous mortgage history and have a more significant impact on your score than if you had no history or negative history.
Vantage Credit Score
The Vantage scoring model is a newer model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) to compete with the FICO model. While not as widely used as FICO, many credit monitoring websites use Vantage to give free credit reports.
While accurate, the Vantage score can vary in accuracy when compared to FICO, which is used more commonly by lenders. However, it serves as a good general indication of your score and can provide a rough idea of where your overall scores are.
The Future of Credit Scores
In the next 5-10 years, it's believed that the Vantage scoring model will become more widely used because of its ability to provide the best scoring models based on today's lending standards. This is because credit reporting agencies are the most significant data collection agencies outside of social media companies and the data they provide is the most useful in determining credit scores.
Determining a Good Credit Score
Credit scores on both the FICO and Vantage models range between 350 and 850. A score of 350 is the worst possible credit score, and an 850 is the best. Building high credit scores requires a thorough understanding of where you stand in your journey, so I've outlined critical score thresholds to guide you.
1. 620 or below
If your credit score is 620 or below, you have bad credit. You may have an unfavourable credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit scores, pay your bills on time, and keep at least ten active revolving credit accounts open. Secured credit cards, such as Credit Builder Card or OpenSky Credit Card, are an excellent way to build your credit. A 620 credit score range qualifies you for an FHA home mortgage.
2. 640-680
If your credit score falls within the 640-680 range, you have fair to good credit. Although you have established credit, you may have some adverse credit marks or accounts. High balances on your credit cards may also be a factor. This score range may also reflect new account openings, which can cause a temporary dip in your scores.
3. 740+
A credit score of 740 and above is considered "super-prime" and represents the top 20% of the US population. This score qualifies you for the best interest rates on most loans. If your score is in this range, keep up the excellent work by paying your bills on time and paying off your revolving credit card accounts.
What is the Minimum Credit Score Required to Buy a House?
When it comes to purchasing a house, the minimum credit score requirement depends on the type of mortgage loan you are eligible for. Regulations and requirements for most mortgage loans are comparable but may differ due to government backing. Three of the most popular mortgage loan types include conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are the preferred option for most homebuyers after VA loans. This is because they do not necessitate private mortgage insurance (PMI), which increases down payment or monthly expenses. The mortgage requirements generally include a minimum credit score of 640 and debt-to-debt ratio of not more than 43%. Conventional loans also feature lower downpayment requirements and better interest rates than other loan types.
FHA Loan
FHA loans have a marginally lower credit score range, primarily between 580 and 619. While different lenders have varying loan programs, it is always advisable to shop around for the best financial options. An FHA loan will require mortgage insurance for approximately eleven years - something to consider if cost is a concern. With a higher debt-to-income limit of up to 50%, repayments are more achievable with lower income. Although it has a lower downpayment, typically 3.5%, it comes with higher interest rates.
VA loan
The VA Loan does not have a strict credit score requirement. However, lenders consider previous defaulted loans and any government-owed past-due debts when pre-qualifying you. For eligibility, a minimum of 181 days of active military service, 90 days during wartime or six years with the National Guard is required. If your spouse was in the military and lost their life during active duty, you are eligible too. These loans often come with the best interest rates and usually do not require any down payment, making it a perfect fit for our veterans.
Credit History - A Key Factor in Car Purchases
The credit history of an individual plays a crucial role in determining the interest rate on a car loan, which is more important than the credit score itself. While a higher credit score is favourable, lenders analyze the borrower's past credit records when deciding whether to extend credit to them. Someone with previous auto loan defaults, late payments, or repossessions will face a considerable challenge in securing a loan as compared to someone who has a clean record. Nonetheless, the lenders specializing in bad credit are keen to qualify anyone for a loan, though with specific requirements such as higher down payments and additional dealership fees to secure their investment. Even dealerships have to bear some fees to reduce the risk of loan defaults and further approve individuals. Having some equity or a down payment upfront can make the most significant difference when purchasing a vehicle on credit.
New Vehicle Credit Score Range
There is no exact credit score for guaranteed loan approval since several factors determine one's suitability for a loan. Ideally, a score above 680 is considered favourable, and anything below it poses an increased risk to the lenders. For instance, someone with a credit score of 720 or above might pay an average interest of $5,500 on a loan, while a score ranging from 580-619 will increase the interest rate exponentially due to the level of risk involved. It is evident that the higher the credit score, the less the interest paid, ultimately affecting a person's credit rating positively.
Tips for Improving your Credit Score
Improving your credit score can be achieved by taking some crucial steps now without much effort. Although it takes time to build a good credit score, patience is essential to avoid making irrational decisions. To raise your credit score, consider the following:
1. Open 3-5 revolving credit accounts:
Revolving credit can help maximize your credit scores, especially if you have limited credit or are rebuilding your credit. Opening a secured credit card that focuses more on your ability to pay, like Open Sky or Credit Builder Card, gives you the best chance of approval. Revolving credit accounts make up 30-35% of your overall score and helps build credit quickly. However, ensure you pay your balance on time and keep it between $5-10.
2. Raise your limits:
Requesting a credit limit increase for your credit cards can help increase your overall credit limits and lower your utilization percentage. Increase your credit limits to help reduce your utilization percentage when your credit card balances exceed 30% of your credit limits.
3. Pay down your balances:
Keeping your balance low is critical in improving your credit score. Use your credit cards for small purchases and leave about a $1-5 balance when paying your bill each month. If you have high balances, make a game plan to pay them down instead of using your credit cards. It is essential to limit your credit card usage to improve your scores while avoiding high-interest rates.
Final Thoughts from Joe to Improve Your Credit Score
Maintaining a great credit score is achievable, even if you have experienced a less than ideal credit history in the past. Taking a proactive approach towards improving your credit is essential to seeing significant changes in your scores in a short amount of time. Many individuals with bad credit feel trapped and assume they will never be able to restore their creditworthiness. However, with a consistent effort, it's possible to develop an excellent credit score. To succeed in this process, it's crucial to prioritize your credit and adjust any problematic spending habits.