It may come as a surprise, but credit scores can be broken down into 30 different levels. Many individuals seeking the best credit score can become overwhelmed with conflicting information they find on Google. Often, the information available can be misguiding and leave individuals confused. As someone who has been working in the financial literacy and credit repair industry for more than 15 years, I'm pleased to offer you credible insights on important topics like credit scores. Over the years, I have had the pleasure of helping over 20,000 clients improve their credit ratings significantly. In this article, I will share invaluable tips that will equip you with the knowledge you need to achieve the same level of success. So, without further ado, let's dive right in!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
Credit Scores Needed for Various Types of Mortgages
Determining the Ideal Credit Score for Buying a Car
Tips for Improving your Credit Score
Expert Opinion from Joe
Different Types of Credit Scores: FICO and Vantage
If you are planning to acquire or improve your credit score, there are two significant credit scoring models that you should know about: FICO and Vantage. Knowing the differences between these models regarding how they calculate your credit score is essential.
FICO Credit Score
The FICO model is the most popular and widely used credit scoring model, consisting of eight different FICO models from FICO 2 to FICO 10. Different FICO models can generate varying credit scores, depending on your credit history and the type of lender you use. For example, if you apply for a home loan, the mortgage lender will most likely use Fico 5 credit report, whereas credit card companies mainly use FICO 8 model. The reason for different FICO scores is that each credit report has a different "weight" on factors critical to the lender, like your payment history and previous credit history.
Vantage Credit Score
The Vantage model is a new credit score competitor created by the three major credit reporting agencies (Equifax, Experian, and TransUnion). Although the FICO model dominates the lending sector, the Vantage model is gaining popularity in personal loans and auto lending. Although the Vantage score is not widely used for lending purposes, its accuracy depends on how you use it. It is a good "general idea" of your FICO score, especially when you cannot pay for your FICO score or have a lender pull your credit report.
Which Model is Better?
The best credit score model depends on how lenders use these models in the future. FICO currently dominates the lending sector, but Vantage is catching up, scoring high in sectors such as personal loans and auto lending. Although the Vantage score is relatively new and may not be accurate for lending purposes, its growing popularity indicates a potential shift in the credit scoring industry. Credit reporting agencies like Vantage which have vast data collections have a competitive advantage in providing the best credit score data possible.
Understanding Good Credit Scores
Credit scores are measured on a scale of 350 to 850 for both the FICO and Vantage models, where 350 is the lowest and 850 is the highest score. When striving to achieve the best scores, it is important to know where you stand on the journey of building your scores. To help, we have listed some significant score thresholds below:
1. 620 or below:
This is regarded as a poor credit score, indicating a negative credit history, potentially high-balance credit card accounts, or having no credit cards at all. To improve your credit scores, pay your bills on time, and keep at least ten active revolving credit accounts. Consider the Credit Builder Card or OpenSky Credit Card, both secured credit cards that can help you improve your credit. At a 620 credit score level, you can qualify for an FHA home mortgage.
2. 640-680:
A credit score in this range connotes fair to good credit. You have likely established credit, but derogatory marks or accounts, high credit card balances, or new accounts may drag your score down temporarily. If you recently opened a new account, don't worry; this is a temporary drop in your scores and will eventually bounce back.
3. 740+:
Scores over 740 are "super-prime" and will give you favorable interest rates for most loans. If you have a 740 credit score, congratulations! You belong to the 20% of the US population with this score. Keep up the excellent financial habits of paying your bills on time and maintaining paid revolving credit card accounts; you're in great shape!
Credit Scores Needed for Various Types of Mortgages
The requirements and guidelines for getting a mortgage loan depend on the specific loan program you are interested in. Most loan types have similar prerequisites, but to a certain extent, there is some difference due to federal regulation and government backing. Generally, the most commonly used loan types are Conventional loans, FHA loans, and VA loans.
Conventional Loans
Conventional loans are highly preferred options besides VA loans. Usually, these loans offer lower down-payment requirements and better interest rates than other types of mortgage loans. In contrast to other loans, Conventional Loans also do not require you to keep private mortgage insurance (PMI), which can raise your monthly payments. Conventional loan providers need a minimum credit score of 640 and a debt-to-income ratio of up to 43%.
FHA Loan
FHA mortgage loans are especially suitable for people with lower credit scores, typically between 580 and 619. However, all loan programs have distinctive requirements, so looking into numerous lenders is the wise thing to do. While the down-payment requirement on FHA Loans can be as low as 3.5%, they will force you to keep PMI for at least 11 years, which adds to your monthly mortgage payments. FHA loans have a higher debt-to-income limit of up to 50%, and therefore, if your salary is comparatively low, you may be able to purchase a property with this loan type. Typically, an FHA loan has a higher interest rate than a Conventional Loan.
VA Loan
VA loan programs do not have a designated credit score requirement, but usually, a careful lookout is kept on defaulted loans and previous debts owed to the government. To qualify, a person must have served in the U.S. Military for at least 181 days, served 90 consecutive days during wartime, or served 6 years with the National Guard. Alternatively, if their spouse was in the military and met their demise during active duty, they may also qualify. VA loans have no down-payment requirement and typically offer the best interest rates. It is an excellent way of showing support for our brave veterans.
Remember to consult with lenders to get accurate and updated information about the credit scores required for each type of mortgage loan.
Determining the Ideal Credit Score for Buying a Car
When you're in the market for a car, it's crucial to remember that your credit history plays a more significant role in determining your eligibility, rather than your credit score. While a higher credit score is certainly essential, it isn't the only factor that impacts your interest rate. In case you have credit issues, loan providers analyze your previous and current credit histories to assess the risk of lending you money. This means someone with a repossession or late payment history might face more difficulty securing a loan than someone who has an unblemished credit history.
Special finance lenders can help individuals with bad credit scores secure a car loan, but they come with caveats. The loan approval has specific requirements, like a higher down payment and extra dealership fees. This lets the dealership cover the cost of approving the loan and reduce the risk of borrowers defaulting. Suppose you're purchasing a car with equity or a down payment. In that case, you're likely to receive lower interest rates than buying a vehicle on credit alone.
Credit Score Range for Purchasing a New Car
While there isn't an exact credit score that guarantees approval, a score of 680 or above is favorable. Once your score drops below this number, the interest rate gradually increases due to higher lending risks for the purchaser. It's essential to understand that the higher your credit score, the less interest you'll pay overall. For instance, someone with a credit score of 720 or more will pay an average of $5,500 in interest on a loan, while someone with a credit score of 580 or above will pay an average of $15,300 in interest on a loan. Therefore, it's wise to maintain a higher credit score to pay less interest and improve overall creditworthiness.
Tips for Improving Your Credit Score
Improving your credit score requires effort over an extended period. Be patient since this isn't an overnight process, and avoid making rash decisions that can ultimately impact your score negatively. There are a few steps you can take now to enhance your credit score. These include:
1. Open 3-5 Revolving Credit Accounts
Revolving credit, particularly credit cards, is one of the easiest ways to maximize your credit score. It's also a great option for individuals with limited credit history or those looking to rebuild their credit. You can start by obtaining a secured credit card, like Credit Builder Card or Open Sky, which focuses on your ability to pay on time, instead of your credit score.
Revolving credit accounts makeup roughly 30-35% of your credit score and can help you build your scores quickly. However, paying your balances on time and keeping them at $5-10 each time you make a payment is crucial. Limit the card to small purchases such as gas or groceries.
2. Raise Your Limits
You can request a credit limit increase for your credit cards to help increase your overall credit limits and reduce your credit utilization percentage. This is essential because, if your credit card balance exceeds 30% of your overall limits, it can affect your credit score negatively.
Each credit card company has a different approach when it comes to increasing limits. Some allow you to do it via your online portal, while others require you to call in. If you're unsure, contact your credit card company and request a “Credit Limit Increase.â€
Typically, credit card companies want to see 7-15 months of excellent payment history on a credit card before they agree to do this.
3. Pay Down Your Balances
Keeping your balances low and close to zero is crucial. Although you aren't obliged to use your credit cards every month, making small purchases and leaving a $1- $5 balance on your credit cards when it's time to pay your bill is recommended.
If you have high balances and lack the financial resources to pay your credit cards off, create a game plan to pay off an “x†percentage of your paycheck each month until your balance is lower. Ultimately, aim to stop using the credit cards altogether since the card spending habits play a crucial role in your overall credit score.
Remember, credit card rates are high, and most of your payments go toward interest rather than reducing your principal amount.
Expert Opinion from Joe
Credit score problems are not uncommon and most people might have experienced it at some point in their life. But, by taking a serious approach toward your current credit status and dedicating enough time and effort to work on yourself and your credit, you can witness a significant improvement in your credit score quickly. Many individuals with poor credit are trapped in the never-ending cycle of credit problems and they start feeling like having a good credit score is beyond their reach. However, enhancing the credit score is a long process that demands patience, hard work, and a well-balanced lifestyle. Prioritizing credit, creating a budget plan, and fixing bad spending habits can directly benefit your credit score. Therefore, if you want to understand credit and need guidance to repair your credit score, visit our website www.asapcreditrepairusa.com, and get our professional assistance.
Below mentioned are some key steps you can take to start your journey toward a better credit score:
1. Take your current credit situation seriously
2. Dedicate enough time and effort to work on yourself and your credit
3. Prioritize your spending and create a budget plan
4. Fix any bad spending habits that you may have