It's surprising how many people aren't aware that there are 30 different levels of credit scores. The internet can be a maze of contradicting information when searching for the best credit score. Sifting through the confusing and sometimes inaccurate results can be daunting. My name is Joe Mahlow, and with over fifteen years of experience in the financial literacy and credit repair field, I aim to give you direct advice on a variety of topics, beginning with credit scores. Having helped more than twenty thousand clients transform their credit scores, I hope to provide you with enough information to do the same. So, let's dive in!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Credit Scores
Determining the Right Credit Score for Home Buying
Understanding Credit Scores and Auto Loans
Tips for Improving your Credit Score
Joe's Views on Credit Situation Improvements
Different Types of Credit Scores: FICO and Vantage
Credit scores are essential factors in determining eligibility for loans and other financial products such as credit cards. Two credit scoring models familiar to many are FICO and Vantage, both of which come with their own calculations of creditworthiness.
Understanding FICO Credit Score
FICO is the most commonly used credit scoring model, with eight different models ranging from FICO 2 to FICO 10. These models provide different credit scores depending on the credit report involved. For instance, a FICO 5 credit report is necessary when trying to apply for a home, while a credit card application requires a FICO 8 credit report.
Why So Many FICO Scores?
Each credit report has different factors that impact the final score. Mortgage lenders use an individual's payment history on previous mortgages heavily in determining the FICO 5 score, while credit card companies primarily rely on the FICO 8 score, with previous credit card history impacting it. On the other hand, auto lenders weigh individuals' previous auto history when using the FICO-2 report. One can easily view their different FICO scores by signing up for an account on www.myfico.com.
Understanding Vantage Credit Score
In response to the FICO scoring model, the three major credit reporting agencies (Equifax, Experian, and TransUnion) have developed the Vantage Score as a competing credit scoring model. Though a relatively new model, Vantage is gaining popularity in sectors such as personal loans and auto lending, where lenders need to rely on a more accurate scoring model.
Is the Vantage Score Accurate?
Vantage is an accurate scoring model compared to FICO, but it remains less widely used for lending purposes. The FICO model remains dominant in the lending sector, but Vantage's accuracy can be useful in giving an overall idea of an individual's FICO score. When gauging your overall score, consider using the Vantage score to give a rough estimate.
In the next 5-10 years, Vantage's accuracy will likely close the gap with FICO, as users look for more modern, transparent and user-friendly scoring models. Credit reporting agencies have the upper hand in providing the best scoring models, making them a vital component in a sound financial plan.
Understanding Credit Scores
Credit scores for the FICO and Vantage models range from 350 to 850, with the former being the worst possible score and the latter being the highest. Knowing the score bracket you fall into is essential for setting a goal to build your score. The following score thresholds will guide you:
1. 620 or below:
This is considered bad credit. If you fall into this range, you most likely have some adverse credit history, high-balance credit card accounts, or no credit cards in general. Timely payments and ten active revolving credit accounts can significantly improve your scores. Consider the OpenSky Credit Card or Credit Builder Card, which are secured credit cards ideal for building credit. Once you hit the 620 range, you can start qualifying for an FHA home mortgage.
2. 640-680:
Scores in this range fall under fair-to-good credit. You have established credit at this point, but you may have some derogatory marks or accounts and high credit card balances. It's also common to experience a temporary drop in scores if you recently opened a new account.
3. 740+:
Any score over 740 is considered 'super-prime' and opens up access to the best interest rates for most loans. If you have over 740 credit score, you are part of the top 20% of the US population. Keep up the good work by always paying your accounts on time and keeping your revolving credit card accounts paid.
Determining the Right Credit Score for Home Buying
The required credit score for purchasing a home depends on the kind of mortgage loan you’re seeking. Mortgage loans are regulated federally with similar requirements and criteria, except for some differences. The most common kinds of mortgage loans are the FHA, VA, or conventional ones.
Conventional Loans
These loans are the most popular. With lower interest rates and downpayment requirements than other mortgage loans, a credit score of 640 and a debt-to-income ratio lower than 43% is typical for this loan. Conventional loans do not require private mortgage insurance (PMI), saving you money.
FHA Loan
For lower credit scores, this mortgage loan is available, usually from 580 to 619. Different lenders offer different financial options if you are within the credit score limit. FHA loans require a PMI for 11 years, which is a downside. However, with a high debt-to-income limit of up to 50%, you could purchase more homes than with a conventional loan, assuming you have a lower income. With a minimum 3.5% downpayment, an FHA loan is a more affordable option than most mortgage loans.
VA Loan
Although there is no specific credit score requirement, the VA loan looks for previously defaulted loans and government-owed past-due debts when pre-qualifying you. You must also have a minimum of 181 days of service in the U.S. military, served 90 continuous days during wartime, 6 years with the National Guard, or be the surviving spouse of a service member who died during active duty. With no down payment necessary, this loan usually has the best interest rates available. It is an excellent option that takes care of our veterans.
Understanding Credit Scores and Auto Loans
When applying for a car loan, lenders consider your credit history more important than just your credit score. A higher credit score is favorable, but it plays a less significant role in determining the rate you qualify for. Your credit history tells more about the risk you pose in extending credit. A poor credit history, such as late payments, repossession of a previous auto loan, or low credit score, can make it harder to obtain approval for a loan. Some special finance lenders approve anyone with bad credit or a history of repossession. However, they add conditions such as a higher down payment and additional dealer fees to lessen the risk of the customer defaulting. This is why the dealership may limit the cars you can choose from since they have a higher markup to cover any risks. Having equity or a downpayment gives you more negotiating power.
To better understand the ideal credit score range, you must first note that your credit score is not the only factor in determining approval. Nonetheless, a credit score above 680 is favorable. A score below 680 increases the interest rate you pay, mainly because of the risk you offer. The higher your credit score, the less interest you pay, as proven by the following data:
1. Someone with a 720 credit score or above pays an average of $5,500 in interest on a loan.
2. Someone with a 680 credit score or above pays an average of $6,600 in interest on a loan.
3. Someone with a 650 credit score or above will pay, on average, $8,100 in interest on a loan.
4. Someone with a 615 credit score or above pays an average of $10,200 in interest on a loan.
5. Someone with a 580 credit score or above pays an average of $13,900 in interest on a loan.
6. Someone with a credit score of 580 or above pays an average of $15,300 in interest on a loan.
Therefore, it is evident that a low credit score can lead to higher interest rates, ultimately affecting your credit score.
Tips for Improving Your Credit Score
Improving your credit score is an essential task, and there are several steps you can take to make that happen. However, building a good credit score is a gradual process that takes time. Therefore, patience is crucial. Without it, you may make hasty decisions that worsen your credit problems. Here are some tips to help raise your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is an excellent way to maximize your credit scores. This is particularly true if you have limited credit or you are looking to rebuild your credit. Starting with a secured credit card, such as Open Sky or Credit Builder Card, is a good choice as they focus on your ability to pay your bills on time rather than your credit score. Revolving credit accounts make up 30-35% of your overall credit score and can quickly increase your credit score. It usually takes 2-4 months to reflect the changes.
2. Raise Your Limits!
Requesting a credit limit increase on your existing credit cards can help you increase your overall credit limits and lower your credit utilization percentage. Most people utilize their credit cards, but exceeding 30% of your overall limits can negatively impact your credit scores. Raising your credit limits can help lower your utilization percentage.
3. How Do I Raise My Limits?
Each credit card company has different processes, and you can do it online or call them directly. Generally, most companies will require you to fill out some information, including your current income, after which their credit team will decide if they want to increase your limit. A good payment history of 7-15 months is usually required before your request is approved.
4. Pay Down Your Balances!
Maintaining low balances and paying your bills on time is critical. You should only use your credit cards for small purchases and leave a $1-5 balance on your card at the end of each month. If you have high balances and can't pay them off, establish a monthly payment plan to reduce the debt gradually. Avoid running the balance back up as this can cost you more money in the long run. Your credit card spending habits play a crucial role in your credit score, so it is essential to minimize their use. Additionally, falling behind on payments can lead to high-interest rates. Therefore, it is important to keep your balances low and under control.
Joe's Views on Credit Situation Improvements
There are times when we have all experienced the burden of having poor credit. However, if you are committed to improving your current credit situation by putting in the necessary effort, you will soon notice a remarkable difference in your credit score. Many consumers with a bad credit history are trapped in a cycle of credit problems, making them think that good credit is impossible to achieve. However, building an excellent credit score requires hard work, and those who make credit a priority and concentrate on their spending behaviors are bound to succeed. Begin by setting up a budget and fixing any poor spending habits you may have. This will have a direct and positive impact on your credit score. This article offers valuable insights into managing your credit, and if you are seeking professional guidance to improve your credit score or require credit repair services, feel free to reach out to our office today at www.asapcreditrepairusa.com.
Lists:
- Don't lose hope, as creating a great credit score requires dedication and commitment.
- Prioritizing your credit and working on your spending habits will eventually pay off.
- Set a budget and focus on remedying poor spending habits.
- This article provides useful information on credit management.
- Contact our office at www.asapcreditrepairusa.com for guidance and professional support in fixing your credit score.