It may surprise you to learn that there are actually 30 distinct levels of credit scores. Despite this fact, many individuals who seek information on credit scores are plagued with conflicting answers and misleading information when they turn to online search engines like Google. I’m Joe Mahlow, and with more than fifteen years of experience in the realm of financial literacy and credit repair, I aim to provide unbiased and factual advice on a variety of topics, including credit scores. Having helped over 20,000 clients improve their credit scores, I’m confident that I can offer valuable insights to help you achieve similar success in your own credit journey. So, let’s delve into this topic together.
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
Determining the Right Credit Score to Buy a House
Understanding the Importance of Credit History When Buying a Car
Simple Steps to Improve Your Credit Score
Advice from Joe on Improving Credit Score
Different Types of Credit Scores: FICO and Vantage
When it comes to credit scores, it's essential to understand the two most commonly used models; the FICO and Vantage score models. Each model has a different method of calculating credit scores, which can impact your overall score.
FICO Credit Score
FICO is the most widely known and utilized credit scoring model, with eight different models from FICO 2 to FICO 10. Based on your credit report, you will receive a different credit score. Different FICO models get pulled depending on the type of credit or purchase you are applying for. For example, if you are applying for a mortgage, lenders usually pull your FICO 5 credit report; for credit cards, they're most likely to pull your FICO 8 credit report.
The reason for many FICO scores is that each credit report has a different "weight." Lenders weigh critical factors, like previous mortgage or credit card history, more heavily than less important ones, leading to variations in FICO scores.
Vantage Credit Score
Equifax, Experian, and TransUnion created the Vantage Score model to compete with the FICO model, but it's newer, having been introduced only recently. Although FICO dominates the lending sector, Vantage is gaining popularity in areas such as personal loans and auto lending. Credit monitoring websites frequently use Vantage to provide free credit reports, which can give you an idea of your overall credit score.
Is the Vantage Score Accurate?
While Vantage Score is accurate, it's not widely used for lending purposes yet, so it may not reflect your actual lending score. However, it's a good "general idea" of your FICO score in the absence of a lender or paid-for report. Many experts believe that the Vantage Score model will become more prevalent in the next five to ten years, as it can provide the best scoring models based on current standards.
Understanding Good Credit Scores
When it comes to credit scores, both FICO and Vantage use a 350-850 range, with 850 being the highest achievable score and 350 being the lowest. To achieve the highest scores possible, it's essential to know where you stand and what goals to set. Here are some important score thresholds to keep in mind throughout the journey of building your credit:
1. 620 or Below:
If you find yourself with a score under 620, it's time to work on improving your score. This score range is considered bad credit and can be the result of adverse credit history, high-balance credit card accounts, or a lack of credit cards altogether. The best way to improve your credit score is to make timely payments and have at least ten active revolving credit accounts open. Two great secured credit cards to help you build your credit are the Credit Builder Card and OpenSky Credit Card. Once you reach the 620 credit score range, you can start qualifying for an FHA home mortgage.
2. 640-680:
A score within this range is considered fair for good credit. It indicates that you have established credit, but you may have some derogatory marks or accounts on your credit report and high balances on your credit cards. Newly opened accounts are also common, and they can temporarily drop your scores. However, don't be alarmed as your scores will eventually recover.
3. 740+:
Any credit score over 740 is considered "super-prime," and it will give you the best interest rates on most loans. Furthermore, if you have over a 740 credit score, you're part of the 20% of the US population that has this score. Congratulations! Keep up the excellent work by paying your accounts on time and keeping your revolving credit card accounts paid. You will be in a fantastic position for future credit endeavors.
Determining the Right Credit Score to Buy a House
The criteria for the credit score you need to purchase a home is contingent on the kind of mortgage loan you intend to qualify for. Since mortgage loans are regulated by the government, the requirements and guidelines for most mortgage loans mostly remain uniform. For example, three main types of mortgage loans are available: conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are prevalent and ideal for saving when considering home loans, aside from VA loans. PMI isn't required in conventional mortgage loans, which can enhance your downpayment or monthly payment. PMI provides protection to the lender in case you fail to make loan payments. Furthermore, conventional loans offer lower down payment limits and better interest rates than other types of mortgage loans. Note that the usual credit score requirement for conventional loans is 640, while the debt-to-debt ratio shouldn't exceed 43%.
FHA Loan
For the FHA loan, mortgages are available for people with low credit scores from 580 to 619. At this point, it is essential to remember that different lenders provide different loan options for varying credit score limits. It's crucial to investigate and compare different lenders' financial offers to find the ideal one for you. FHA loans demand PMI payment that typically lasts for 11 years, which could affect your expenses. However, this loan offers a higher debt-to-income ratio that could allow the purchase of additional homes if your income is minimal. The down payment requirements for FHA loans start as low as 3.5%. However, it's important to note that the interest rates for this type of loan are relatively high.
VA Loan
Although the VA Loan program doesn't technically demand a credit score requirement, it examines if you have previously defaulted on loans or have past-due government debts during pre-qualification. To obtain a VA loan, you must have served in the US military for at least 181 days, served 90 consecutive days during wartime, served with the National Guard for six years, or your spouse was in the military and died during active service. VA loans often have the most favorable interest rates and don't usually require a down payment. As an added benefit, the VA loan presents a unique opportunity to give back to our veteran community.
Understanding the Importance of Credit History When Buying a Car
When purchasing a car, your credit history is the most critical factor in determining your qualification, not just your credit score. While having a higher credit score is vital, it plays a minor role in the interest rate you can qualify for. When you apply for a car loan and have bad credit, lenders assess your credit histories to evaluate the risk involved in offering credit. Late payments or repossession of an auto loan makes you pose a higher risk than someone with a clean credit history. Bad credit or special finance lenders can approve almost anyone for a car loan, but they impose strict criteria such as a higher down payment and extra fees to mitigate the risk. The dealership also pays a fee to approve you for loans to minimize the risk of defaulting. When buying a car, having equity or a downpayment will give you more leverage. There isn't a definitive credit score to determine approval since various factors come into play, but a credit score over 680 is ideal. An assessment of various credit scores shows that those with higher credit scores pay less interest, affecting overall credit score.
Here's an example of how credit score affects the interest paid on a loan:
- A person with a credit score of 720 or higher would pay an average of $5,500 in interest on a loan.
- A person with a credit score of 680 or higher would pay an average of $6,600 in interest on a loan.
- A person with a credit score of 650 or higher would pay an average of $8,100 in interest on a loan.
- A person with a credit score of 615 or higher would pay an average of $10,200 in interest on a loan.
- A person with a credit score of 580 or higher would pay an average of $13,900 in interest on a loan.
- A person with a credit score of 580 or above would pay, on average, $15,300 in interest on a loan.
As evidenced by the above data, those with a higher credit score pay less interest and pose less risk to the lender, hence affecting their overall credit score.
Simple Steps to Improve Your Credit Score
Improving your credit score takes some effort, but it's not impossible. The process can be daunting, and it's essential to have patience in building credit because it takes time. With that being said, there are things you can do right now to help improve your credit. Here are some tips to help you along the way:
1. Open 3-5 Revolving Credit Accounts
Revolving credit is an effective way to maximize your credit scores. It's easier and gives you the best chance of approval, especially if you have limited credit or are looking to rebuild your credit. To start, we recommend opening a secured credit card such as Open Sky or Credit Builder Card. These cards focus on your ability to pay on time rather than your credit score. Revolving credit accounts make up 30-35% of your overall credit score and can help improve your score quickly. Make sure to pay on time and keep a balance of $5-$10 to show activity. Limit your usage to small purchases like gas or groceries.
2. Raise Your Limits
Requesting a credit limit increase for your active revolving credit card accounts can help increase your overall credit limits and lower your credit utilization percentage. To request a credit limit increase, contact your credit card company. The process varies depending on the company, but they may ask for your current income and credit history. You'll need to have an excellent payment history for at least 7-15 months.
3. Pay Down Your Balances
Keeping your balance low and near zero is crucial. Avoid using your credit cards unless necessary, and when you do, leave a small balance of $1-$5 and pay on time. If you have high balances and cannot pay them off at once, make a plan to pay them down gradually. Remember, credit card spending habits play a massive role in your overall credit score, so limit your usage and budget accordingly. Additionally, rates on credit cards can be high, and most of your payments will go towards interest and not principal.
Advice from Joe on Improving Credit Score
We have all experienced having a less than desirable credit score at some point in our lives. However, it is crucial to take your credit situation seriously if you want to see significant improvements to your credit score in a short amount of time. Most consumers with bad credit fall into the trap of believing that having good credit is unattainable. Nevertheless, developing a great credit score requires dedication and effort. Prioritizing your credit and identifying and addressing bad spending habits are the keys to success in this regard. Start by drafting a budget and working on fixing any bad spending habits you may have. This will undoubtedly have a positive impact on your credit score. This article aims to provide you with a better understanding of credit. If you need help or guidance in improving your credit score or repairing bad credit, reach out to my office today at www.asapcreditrepairusa.com.
Key Takeaways:
It's important to take your credit situation seriously to see significant improvements to your credit score
Most people with bad credit tend to believe that having good credit is impossible
Prioritizing and focusing on your credit and spending habits is paramount to developing good credit score
Start by drafting a budget and working on identifying and addressing bad spending habits
Reach out to www.asapcreditrepairusa.com for guidance and help with improving or repairing your credit score.