It's surprising to learn that there are actually 30 different credit score levels in existence. It's quite easy to get lost in the endless search for information on the best credit score, since the results can be overwhelmingly diverse and at times, confusing or even deceptive. My name is Joe Mahlow, and I have ample experience in the realms of financial literacy and credit repair for over fifteen years. My aim is to offer you straightforward advice on a variety of topics, starting with credit scores. I'm proud to have assisted over twenty thousand clients in elevating their credit scores, and I'm eager to offer you the same valuable information. Let's dive in!
Contents:
Understanding the Different Credit Score Models
Understanding a Credit Score: Ranges, Thresholds, and Tips
Credit Score Requirements for Different Mortgage Loan Types
Importance of Credit History When Buying a Car
Tips for Increasing Your Credit Score
Insights from Joe on Improving Your Credit
Understanding the Different Credit Score Models
There are two primary credit scoring models used today: the FICO model and the Vantage model. It is essential to have a good understanding of both models, as they calculate your credit score differently.
FICO Credit Score
FICO is the most commonly used credit scoring model. With eight different models, each calculated differently based on your credit report, it can be confusing. Each model represents a different weight given to critical factors related to the type of credit you are applying for. For example, when applying for a mortgage, your lender will most likely pull your FICO 5 credit report, while credit card companies use FICO 8. Auto lenders, on the other hand, typically pull FICO 2 reports.
Vantage Credit Score
The Vantage Score model was developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion) as a competitor to the FICO model. The Vantage model is predominantly used for personal loans and auto lending and gaining popularity among credit monitoring websites. While the Vantage score is accurate, it is not widely accepted for lending purposes and cannot replace a FICO score. However, it can provide you with a general idea of your FICO score to help you better understand your overall credit score.
Should you use a Vantage Score?
While the Vantage Score model is not as widely-used as the FICO model, it is gaining popularity. It is a good idea to sign up for a credit monitoring service that provides you with your Vantage score to give you an estimate of your FICO score. In the next 5-10 years, it is highly likely that more lenders will use the Vantage scoring model as it has an advantage in providing the most comprehensive scoring models based on today's data standards. It is worth noting that credit reporting agencies hold a vast amount of data. So, if they have the data, they can provide the best information for scoring data.
Understanding a Credit Score: Ranges, Thresholds, and Tips
Credit scores by the FICO and Vantage models are rated from 350 to 850, with 850 being the highest possible score and 350 being the lowest. Knowing where you stand as you strive to raise your scores is essential, so here are some critical thresholds:
1. 620 or below:
This rating is considered ‘bad credit.' If you're below this range, you most likely have an unfavorable credit history, high balance credit card accounts, or no credit cards at all. To improve your scores, make timely payments and actively use around ten revolving credit accounts. Secured credit cards like those of Credit Builder Card or OpenSky Credit Card are recommended to help build your credit. Upon reaching the 620 range, you'll have a shot at qualifying for an FHA home mortgage.
2. 640-680:
This rating falls in the ‘fair’ category. Scores in this range indicate that you've established credit, although you may have accounts with a derogatory remark or high balances on your credit cards that need paying off. A common occurrence is a temporary dip in your scores after opening a new account. If you've recently opened one and have your score in this score range, do not panic.
3. 740+:
At 740 and above, your credit score is regarded as "super-prime," and you'll receive favorable interest rates for most loans. With a rating over 740, you're part of the 20% of the US population who have this score. Keep up the excellent work by settling your accounts on time and regularly paying your revolving credit card accounts, and you'll maintain your enviable scores.
Credit Score Requirements for Different Mortgage Loan Types
The credit score necessary to qualify for a mortgage loan depends on the type of loan you are seeking. Mortgage loan requirements and guidelines will differ between the various loan types, which are generally categorized into three types: conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular and financially-sound loan option outside of the VA loan. With this loan, private mortgage insurance (PMI) does not have to be maintained, unlike other loans, including an FHA loan. The PMI protects the lender in the event you stop making payments on your loan, making conventional loans of less risk for the lender. A typical credit score requirement for a conventional loan is 640, and the debt-to-debt ratio should not go above 43%. Moreover, these loans have lower downpayment requirements and better interest rates than other mortgage loans.
2. FHA Loan
The FHA loan is for those with lower credit scores between 580 and 619. But every loan program is distinct, so when your credit score is within the limits, you need to shop around for different lenders that present the best financial option for you. The FHA loan has a high debt-to-income limit of up to 50%, allowing you to purchase more homes than with the conventional loan if you have a lower income. However, you will have to pay PMI for at least eleven years, which adds up to your mortgage and should factor into your budgeting. Last, the downpayment requirement on this loan is as low as 3.5% of the purchase price, but interest rates are typically higher.
3. VA Loan
Technically, there is no specific credit score requirement to qualify for a VA Loan. But, pre-qualification requires the lender to look into your previous defaulted loans and any past-due debts you owed to the government. You can qualify for this loan if you have 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 if your spouse was a military casualty during active duty. VA loans generally offer the best interest rates, and no down payment is required, making them a popular option for veterans.
Importance of Credit History When Buying a Car
When purchasing a car, your credit history is the most critical factor in determining loan eligibility, rather than just your credit score. One's credit score does play a role, but the interest rate they are eligible for is heavily dependent on their credit and payment history. A lender examines current and past credit history to evaluate risk associated with lending. For instance, individuals who have defaulted or have late payments on an auto loan will find it more challenging to get loan approval compared to those with a good history. Some lenders specialize in providing loans to those with weak credit ratings; however, additional criteria must be fulfilled, such as a higher down payment and dealership fees. Additionally, a dealership pays a fee to reduce the risk of default and approve your loan, which is why they may restrict the car options available to you. To increase your leverage when making a credit purchase, it is advisable to have a down payment or equity.
Loan Approval and Credit Score
While there is no exact score that guarantees loan approval, a score above 680 is preferred. A lower score means a higher interest rate because the lender considers you a high credit risk. The impact of credit scores on interest rates can also be seen through a comparison of current loan interest rates based on credit scores. An individual with a credit score of 720 or more pays an average of $5,500 in interest, someone with a score of 680 may pay up to $6,600, a score of 650 can result in a total of $8,100 interest payment, while a score of 615 and 580 incur $10,200, $13,900, and $15,300, respectively. One's credit score affects the overall amount of interest payable; hence, the higher the score, the lower the interest rate that applies.
Tips for Increasing Your Credit Score
It may seem daunting, but there are several things you can do to improve your credit score over time with some effort. Patience is key when building your credit score, as making impulsive decisions will likely not help your cause. Here are some of the steps you can take today to start improving your credit:
1. Open 3-5 revolving credit accounts.
Revolving credit, like credit cards, can help you build your credit score quickly. For people with limited credit or those looking to rebuild, it may be challenging to qualify for a large loan. Therefore, getting a secured credit card may be a great option. Choose a card that does not focus on your credit score, such as Open Sky or Credit Builder Card. Paying your balance on time and keeping it low, ideally between $5-$10, is crucial to building credit.
2. Raise your limits.
Your credit card utilization percentage can hurt your score, so try increasing your credit limits. The process can be done online or by calling your credit card company. You will need to fill out some information, including your current income, and the company's credit team will decide if it's possible.
3. Pay down your balances.
Keeping your credit card balances low, or close to zero, is critical to maintaining a high credit score. Avoid overspending on your credit card, and try to use it only for small purchases, like gas or groceries. If you have high balances, create a monthly plan to pay them down, and avoid using them again until you're debt-free. Remember, high-interest rates can make credit card debt hard to pay down.
Insights from Joe on Improving Your Credit
Having less than stellar credit can be a shared experience among many individuals. However, putting in the time and effort to work on your credit can yield massive improvements in a short period. Many consumers with poor credit feel as though they are trapped in an unending cycle of credit problems, but it is possible to have good credit again. Developing a great credit score involves prioritizing credit and focusing on sound spending habits. Initially, you can create a budget to help with developing healthy spending habits that directly influence your credit score. This article provides valuable insights into credit, but if you require guidance or assistance with credit repair, reach out to my office today at www.asapcreditrepairusa.com.