It's surprising to learn that there are actually 30 different credit score levels. Many individuals search for the best credit score, but often receive an overwhelming amount of conflicting information from Google that can be confusing and misleading. As someone who has been involved in the financial literacy and credit repair industry for more than fifteen years, I'm here to share my raw advice on various topics, starting with credit scores. Over the years, I've had the opportunity to help more than twenty thousand clients rebuild their credit and improve their credit scores. In this article, I hope to provide you with enough information to help you do the same. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage
What is a Good Credit Score: Understanding Your Credit Scores
What is a Suitable Credit Score for Buying a House?
Determining the Ideal Credit Score to Buy a Car
Tips for Increasing Your Credit Score
Insights from Joe: Overcoming Bad Credit
Different Types of Credit Scores: FICO and Vantage
Credit scores are essential in determining an individual's creditworthiness for lenders. There are currently two scoring models that are widely used, the FICO model and the Vantage model. Understanding these models' differences in calculating credit scores is crucial for credit management.
FICO Credit Score
The FICO credit scoring model is the most widely used, with eight different FICO scores ranging from FICO 2 to FICO 10. Each FICO score is generated depending on the credit report used by the lender. Mortgage lenders, for example, primarily use FICO 5, whereas credit card companies use FICO 8. This is because the weight of certain factors varies between credit reports. For instance, previous mortgage history weighs more heavily on FICO 5 scores than FICO 8 scores. FICO scores are influenced by an individual's credit history in a specific sector, like auto lending, making it challenging to obtain a complete view without checking all eight scores.
To better comprehend an individual's FICO credit scores, it is recommended that they sign up for an account on www.myfico.com.
Vantage Credit Score
Developed by Equifax, Experian, and TransUnion, the Vantage Score was created to rival the FICO scoring model. Although the Vantage Score model is newer, it has become widely used by credit monitoring websites to provide individuals with their credit reports free of charge. However, unlike the FICO model, Vantage Scores are not typically used for lending purposes, making them less reliable than FICO scores.
There is potential for the Vantage Score to gain popularity in sectors like personal loans and auto lending, leading to its wider use in the future. Considering a credit reporting agency's significant role as a data collection agency, they possess the ability to provide the best scoring data using the latest standards.
In conclusion, understanding the type of credit score is vital for credit management. FICO and Vantage models come into play when an individual applies for credit, and knowing their differences helps understand how their credit score was obtained.
What is a Good Credit Score: Understanding Your Credit Scores
Credit scores range from 350 to 850 under both FICO and Vantage models. A score of 850 is considered to be the best, while a score of 350 is the worst. It is crucial to assess your standing when building credit to set achievable goals. Here is an overview of some critical credit score thresholds:
1. 620 or below
Having a credit score of 620 or below is regarded as bad credit. At this point, you might have an adverse credit history, high-balance credit card accounts, or no credit cards at all. To improve your credit score, make timely payments and have ten active revolving credit accounts open. Secured credit cards like Credit Builder Card or OpenSky Credit Card can help you build your credit. When you reach this credit score range, you can qualify for an FHA home mortgage.
2. 640-680
This credit score range is considered fair for good credit. If you have a score in this range, you have established credit, but you may have some derogatory marks or accounts on your credit. You may also have high balances on your credit cards that you will need to pay down. Additionally, if you recently opened a new account, it can temporarily drop your score.
3. 740+
A credit score above 740 is considered "super-prime" and will offer you the best interest rates for most loans. If you have a credit score over 740, you are part of the 20% of the US population with the highest score. Always pay your accounts on time and keep your revolving credit card accounts paid to maintain this excellent score.
What is a Suitable Credit Score for Buying a House?
The answer to this question depends on the type of mortgage loan you wish to qualify for. Federal regulation and government backing lead to requirements and guidelines for most mortgage loans being similar, if not different. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular loans and usually the best option for savings outside of the VA loan. These loans do not require private mortgage insurance (PMI), which can increase your monthly payment or downpayment expenditures. PMI ensures the lender in case of payment stoppage by you. Conventional loans have a lower downpayment requirement and better interest rates than other mortgage loans. These loans demand a typical credit score of 640 and a debt-to-debt ratio of maximum 43%.
2. FHA Loan
FHA mortgage loans are suitable for lower credit scores, typically ranging between 580 and 619. As disparities exist among loan programs, find multiple lenders if you are within credit score bounds to avail the best financial option. Borrowers need to maintain PMI on FHA loans for at least 11 years, an added cost to consider when calculating the mortgage budget. FHA loans usually have a higher debt-to-income limit, reaching 50%, allowing you to purchase more homes than a conventional loan if you have a lower income. Although a lower downpayment of 3.5% is necessary, these loans come with higher interest rates.
3. VA Loan
There is no particular credit score requirement for VA loans, but your pre-qualification eligibility depends on any previous defaulted loans or past-due debts owed to the government. You need to have served in the United States Military for at least 181 days, served 90 consecutive days during wartime, served six years with the National Guard, or your spouse should have been in the military and lost their lives during active duty. With the best available interest rates, VA loans tend not to require a downpayment. The VA loan is an excellent way to give back to our veterans rightfully.
Determining the Ideal Credit Score to Buy a Car
Credit history is more essential than credit score when applying for a car loan. Your previous and current credit histories determine the risk involved in extending credit, which outweighs credit score. Bad credit or special finance lenders tend to qualify almost anyone for a car loan, but it comes with additional criteria such as a higher down payment and additional fees to reduce the risk of default. It is possible to gain leverage when buying a car on credit by having equity or a down payment.
There is no fixed credit score that determines loan approval, but a score above 680 is ideal. The lower your credit score, the higher the interest rate you pay and the greater the risk you pose to the lender. As an illustration, someone with a 720 credit score will pay an average of $5,500 in interest, whereas someone with a 580 credit score will pay, on average, $15,300 in interest on the same loan. This shows that credit score affects the overall interest rate.
Tips for Increasing Your Credit Score
It takes time and patience to build a good credit score, and there are things you can do right now to help improve it. With a little effort, you can take steps that will increase your chances of approval for credit in the future. Here are three things you can do right now to improve your credit:
1. Open 3-5 revolving credit accounts (credit cards):
Revolving credit makes up 30-35% of your overall credit score and is one of the best options to help you maximize your credit scores. A good starting point is to open a secured credit card that doesn't focus on your credit score. Two great options are Open Sky or Credit Builder Card. Make sure to pay your balance on time and limit the use of the card to just small purchases.
2. Raise your limits:
You can request a credit limit increase for your credit cards. This will help increase your overall credit limits and lower your credit card utilization percentage. This can be done online through your online portal or by calling your credit card company and requesting a "Credit Limit Increase."
3. Pay down your balances:
Keeping your balance low and close to zero is critical. If you have high balances, make a game plan to take a percentage of your paycheck each month to pay them down. The worst decision someone can make is to spend time and finances to pay down a credit card only to have them run the balance back up. Remember to limit your credit card usage and pay off any balances each month.
Insights from Joe: Overcoming Bad Credit
Experiencing difficulties with credit is a common experience, but it's essential to take it seriously and put in the effort to make significant changes. It's common for people with poor credit to feel like they're stuck in an endless cycle of credit issues, assuming that having good credit is impossible. However, those who prioritize their credit and make a conscious effort to address their spending habits will reap the rewards in the form of an improved credit score. Developing a healthy credit score takes time and dedication, starting with creating a budget and working on improving spending habits. This article provides useful information on credit management. If you're seeking help with your credit score or require credit repair services, don't hesitate to contact my office at www.asapcreditrepairusa.com.