It may surprise you to learn that there are actually 30 different levels of credit scores. This fact can be easily overlooked when searching for information on the best credit scores, as Google often provides a variety of conflicting answers. Unfortunately, much of the available information is not only complicated but also misleading, potentially causing confusion and frustration. My name is Joe Mahlow and I’ve been working in the field of financial literacy and credit repair for over fifteen years. As an expert, my hope is to provide you with straightforward advice on important financial topics like credit scores. Having helped over twenty thousand clients improve their credit scores, I’d like to share my knowledge with you as well. So, let’s dive into the topic of credit scores together!
Contents:
Different Types of Credit Scores: Explained
Understanding Credit Scores
Determining the Suitable Credit Score for Homebuying
Ideal Credit Scores and History for Car Loans
Effective Ways to Improve Your Credit Score
Tips from Joe for Rebuilding Your Credit
Different Types of Credit Scores: Explained
1. FICO Credit Score
The FICO model is the most widely known and used credit scoring model. With eight different models, the FICO score can vary depending on the type of lender and credit report being pulled. For instance, a mortgage lender would most likely pull a FICO 5 credit report, whereas a credit card company would pull a FICO 8 report. This is because each lender weighs different aspects of your credit report more heavily than others. For example, a mortgage lender will weigh your mortgage payment history more heavily than a credit card company would.
2. Vantage Credit Score
The Vantage scoring model is a newer model developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion). While it is not widely used for lending purposes yet, Vantage is gaining popularity in certain sectors such as personal loans and auto lending. It is often offered for free by credit monitoring websites and can provide a general idea of your credit score, but it may not be as accurate as a FICO score.
Conclusion
While the FICO model is more widely used in lending, the Vantage model may become more popular in the future. It is important to understand both models to get a complete understanding of your credit score. Websites like MyFICO.com can give you a better visual representation of all your different credit scores. Remember, credit reporting agencies have the upper hand in providing the best scoring data because they have access to the most significant amount of credit-related data.
Understanding Credit Scores
Credit scores are used by lenders to determine how risky it is to lend money to you. Scores for both the FICO and Vantage models range from 350 to 850, with 350 being the worst credit score you can have and 850 being the best score. To achieve the highest score, it's important to understand where you stand and what you need to do to improve your credit. Here are some thresholds to keep in mind:
1. 620 or below:
This is considered bad credit, with adverse credit history, high-balance credit card accounts, or no credit cards in general. To improve your credit score, make timely payments and have ten active revolving credit accounts open. Consider using a secured credit card, such as the Credit Builder Card or OpenSky Credit Card. Once your score reaches 620, you may qualify for an FHA home mortgage.
2. 640-680:
This is considered fair for good credit, with established credit but possibly some derogatory marks or accounts on your credit, or high balances on your credit cards that you will need to pay down. Newly opened accounts can also temporarily drop your score. Don’t panic if your score falls in this range - your score will return to normal.
3. 740+:
Any score over 740 is considered "super-prime" and gives you the best interest rates for most loans. If you have this score, congratulations! You are part of the 20% of the US population with this score. Keep up the great work by paying your accounts on time and keeping your revolving credit card accounts paid.
Determining the Suitable Credit Score for Homebuying
The ideal credit score for purchasing a home varies based on the type of mortgage loan desired. Mortgage loan requirements and regulations vary due to government backing, and as a result, guidelines for most home loans are similar. The three most prevalent mortgage loans are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most commonly used and are among the best "savings" loan options, other than VA loans. PMI, which can raise your monthly payment or downpayment, is not required by conventional loans; it covers the lender if you fail to repay your loan. They usually have lower downpayment requirements and better interest rates. A typical credit score requirement of 640 and a 43 percent debt-to-debt ratio is expected for conventional mortgage loans.
2. FHA Loans
The FHA loan is for those with lower credit scores, typically between 580 and 619. It is essential to explore various lenders for the best financial choice if you fall within the credit score confines since each loan program is different. FHA loans mandate PMI for at least 11 years, and their debt-to-income limit could exceed 50 percent, enabling you to purchase more homes. FHA loans allow lower downpayments as low as 3.5%, which could allow you to purchase a property with less cash out of pocket.
3. VA Loans
The credit score requirement for VA loans does not exist, but they consider previously defaulted loans and outstanding government debts before pre-qualifying you. There are specific eligibility requirements: you must have either served in the military for at least 181 days, served 90 consecutive days during a war, or your spouse died while on active duty. VA loans usually offer the best interest rates available, and a down payment is usually not required, making it an excellent option that gives back to our veterans.
Ideal Credit Scores and History for Car Loans
When it comes to buying a car, lenders are more interested in your credit history than just your score. Although a good credit score is important, it's not the only deciding factor in the interest rate you qualify for. Lenders check your current and past credit histories to calculate the potential risk of extending credit to you. This means that someone who has a history of late auto loan payments or repossession will likely face higher interest rates and have a harder time getting approved for a loan.
If you have bad credit, there are bad credit or special finance lenders who will qualify you for a car loan, but with specific criteria such as a higher down payment and additional fees to cover the risk. Dealerships may also charge additional fees to approve you for a loan which will impact your car loan approval process. Overall, a good credit score is essential but your credit history and equity or down payment can also significantly influence your car loan approval process.
There is no specific credit score that qualifies you for approval as it varies based on factors such as your credit history, but a score of over 680 is generally considered good. Anything below this score will increase the interest rate charged by the lender. For instance, someone with a 720 credit score or above will pay an average interest of $5,500 on a car loan while someone with a 580 credit score or above can expect to pay up to $15,300 in interest. These numbers show that a good credit score can help reduce the overall interest rate that you pay on your car loan.
Effective Ways to Improve Your Credit Score
Improving your credit score takes time and effort. It doesn't happen overnight, so it's important to exercise patience. Making impulsive credit decisions does not help either, as it can worsen your financial situation. Here are some things you can do to improve your credit score effectively:
1. Open 3-5 revolving credit accounts (credit cards):
Revolving credit is one of the best options to help you maximize your credit scores. It's easier to secure and is particularly useful for individuals with limited credit or those rebuilding their credit. We recommend opening a secured credit card like Open Sky or Credit Builder Card, which primarily focuses on your ability to pay the card on time and not your credit score. A large part (30-35%) of your credit score depends on revolving credit.
2. Raise your limits:
You can request a limit increase for your credit cards to help increase your overall credit limits and reduce your credit utilization percentage. Most cardholders use their credit cards throughout the month. Having a balance that exceeds 30% of your overall limits can have a negative impact on your credit scores. Increasing your credit limits, however, can help lower your utilization percentage.
3. Pay down your balances:
It's crucial to keep your balance low and close to zero. While you're not obligated to use your credit cards every month, using them for small purchases and leaving a balance of about $1-$5 each month can help improve your credit score. If you have high balances, make a plan to pay down credit card debt each month until you eventually stop using them. Remember to manage your credit card usage wisely, as it plays a significant role in your overall credit score.
Tips from Joe for Rebuilding Your Credit
Let's face it, we've all experienced a less-than-desirable credit score at some point. However, the good news is that change is possible, and even achievable in a short amount of time if you invest the necessary effort and time in improving your credit score. Many people who struggle with their credit feel as though they will never break free from the vicious cycle of bad credit. Yet, taking control of your finances and making credit repair a priority can turn things around. Start by creating a budget and working on any poor spending habits you have. This will help to improve your credit score in the long run. If you’re looking for more insight on how to achieve a better credit score or need credit repair assistance, feel free to contact my office at www.asapcreditrepairusa.com.
Here's what you need to know to rebuild your credit:
1. Acknowledge the current state of your credit.
2. Dedicate time and effort to improving your credit score.
3. Develop good spending habits and create a budget.
4. Get professional help if needed.