Were you aware that credit scores can have up to 30 different levels? It's a lesser-known fact that many people don't realize. Finding the ideal credit score can often render various conflicting Google search results, which can be puzzling and sometimes even misleading. As someone who has worked in the financial literacy and credit repair field for more than fifteen years, I can provide unfiltered insights on an array of subjects, including credit scores. I have helped over twenty thousand clients enhance their credit scores, and I aim to offer you sufficient knowledge to achieve the same! So, let's dive in!
Contents:
What are the Two Different Types of Credit Scores?
Understanding Good Credit Scores
Finding the Right Credit Score for Different Types of Mortgage Loans
Determining Your Approval for a Car Loan
Tips to Improve Your Credit Score
Insightful Thoughts by Joe on Credit Improvement
What are the Two Different Types of Credit Scores?
Understanding the different credit scoring models is crucial when it comes to calculating your credit score. The two credit scoring models that you should become familiar with are the FICO model and the Vantage model.
FICO Credit Score
The FICO credit scoring model is the most popular and widely used credit scoring model. There are eight different FICO models, which can yield different credit scores depending on your credit report. This is because lenders will pull different FICO reports based on the type of credit you're applying for. For example, a mortgage lender will typically pull your Fico 5 credit report, whereas a credit card company is likely to pull your FICO 8 credit report. Each FICO model has a unique "weight," with more critical factors having a greater impact on your score. This means that factors such as your previous mortgage or credit card history can weigh more heavily on specific FICO scores, depending on the lender.
Vantage Credit Score
Developed by the three major credit reporting agencies (Equifax, Experian, and TransUnion), the Vantage Score is a newer scoring model than the FICO model. Credit monitoring websites frequently use Vantage to provide free credit reports, and it's gaining popularity in certain sectors like personal loans and auto lending. While the Vantage Score is accurate, it's not widely used for lending purposes and may not be an accurate depiction of your actual lending score.
Is the Vantage Score Accurate?
While the Vantage Score is accurate, it's important to consider its context. Since it's not commonly used for lending purposes, it may not accurately reflect your actual lending score and should be used as a general idea of where your scores stand. However, the Vantage scoring model may become more widely used in the future due to its ability to provide the best scoring data based on today's standards. Overall, credit reporting agencies, as the most significant data collection agencies outside social media companies, have the upper hand in providing the best scoring data.
Understanding Good Credit Scores
Credit scores vary from 350 to 850 for both FICO and Vantage models. A score of 850 is the highest, while 350 is the lowest. In order to set goals to achieve high scores, it’s important to understand certain credit score thresholds.
1. 620 or below:
This is considered a bad credit score. If you are below this threshold, your credit may have a negative history, a high balance on your credit cards, or no credit cards at all. The best way to improve your credit score is to make timely payments and have at least ten active revolving credit accounts open. Secured credit cards like the Credit Builder Card or OpenSky Credit Card can be helpful in building your credit. Once your score reaches 620, you can qualify for an FHA home mortgage.
2. 640-680:
This is considered fair to good credit. A score in this range means that you have established credit but may have some derogatory marks or accounts on your credit. You may also have high balances on your credit cards, which you need to pay down. Newly opened accounts can temporarily cause your scores to drop.
3. 740+:
Any credit score over 740 is considered "super-prime" and entitles you to the best interest rates for most loans. A score of 740+ places you in the top 20% of the US population. Congratulations on your excellent score! Remember to always pay your accounts on time and keep your revolving credit card accounts paid to maintain your great standing.
Finding the Right Credit Score for Different Types of Mortgage Loans
When looking to purchase a house, understanding the ideal credit score needed for a mortgage loan is crucial. However, the score requirement varies, as there are three main mortgage loan types available - conventional loans, FHA loans, and VA loans - each with its unique requirements and guidelines.
Conventional Loans
Conventional loans are the most popular and most cost-effective choice, particularly if you're not qualified for a VA loan. This loan does not require private mortgage insurance (PMI), which protects the lender if you stop making your payments, so you save on added payment costs. Also, conventional loans don't require a significant downpayment, making it easier to own a home. A typical credit score of 640 and a debt-to-debt ratio no higher than 43% is required.
FHA Loan
FHA loans are available for people with a credit score between 580 and 619, and though your options are limited with this score range, it's still possible to qualify. It requires keeping PMI for 11 years, which can be an extra expense on your home loan. But, with a debt-to-income limit of up to 50%, it's possible to buy more homes than with a conventional loan if your income is low. Lastly, FHA loans usually require a minimum of 3.5% on your downpayment, with higher interest rates.
VA Loan
There isn't precisely a credit score requirement with VA Loans. However, previous loan defaults and government-owed past-due debts may affect pre-qualifying. To qualify for a VA loan, you must have served in the military with at least 181 days, 90 consecutive days during wartime, or six years with the National Guard. The VA loan offers the best interest rates and does not usually require a down payment. It's considered the best option for veterans as it supports them perfectly.
Determining Your Approval for a Car Loan
When it comes to purchasing a vehicle, your credit history is the most significant factor in deciding your eligibility for approval, rather than just the score. Despite the importance of having a higher score, it does not necessarily mean you will get a better interest rate. Lenders consider your current and past credit histories when you apply for an auto loan to determine any risks. If you have been late on previous or current car loans or had a car repossessed, getting approved for another loan becomes challenging. But, some lenders that specialize in bad credit may offer car loans even to those with repossessions, but with specific criteria to meet, such as a high down payment or additional fees. Dealerships may also charge extra fees to lessen the risk of defaulting on the loan and approve you for the loan, choosing a car with more profit margin. Additionally, to have an advantage while getting a vehicle on credit, having a down payment is necessary for equity.
Ideal Credit Score for a New Vehicle
The approval criteria involve many factors rendering it impossible to have an exact credit score for car loan approval. However, a score above 680 is preferred because anything below it may result in higher interest rates due to risk for the lender. The following table shows how the credit score range affects the amount of interest you may need to pay:
- A credit score of 720 and above: $5,500 in average interest payment on the loan
- A credit score of 680 and above: $6,600 in average interest payment on the loan
- A credit score of 650 and above: $8,100 in average interest payment on the loan
- A credit score of 615 and above: $10,200 in average interest payment on the loan
- A credit score of 580 and above: $13,900 in average interest payment on the loan
- A credit score of 580 or lower: $15,300 in average interest payment on the loan
The data indicates that a higher credit score leads to lower interest rates, impacting your credit score positively.
Tips to Improve Your Credit Score
Improving your credit score requires effort and time; it doesn't happen overnight. Patience is the key as irrational and hasty decisions can worsen the situation. The following tips can help improve your credit score:
1. Open Revolving Credit Accounts:
Revolving credit is the best option to build credit scores quickly. Secured credit cards like Open Sky or Credit Builder Card, which don't focus on credit scores, can help you get approval. Paying your balance on time and keeping it at $5-$10 each time can improve your credit score in 2-4 months.
2. Raise Your Limits:
If you have active revolving credit card accounts, request a credit limit increase to lower your credit utilization percentage and increase your overall credit limits. Different credit card companies have different processes, but a good payment history needs to be maintained before a credit card company agrees to increase your limit.
3. Pay Down Your Balances:
Keeping your credit card balances low and close to zero is critical. Using your credit cards for small purchases and leaving about a $1-$5 balance each month can improve your credit score. If you have high balances, make a game plan to pay them down gradually, and limit your credit card usage to avoid exhausting your finances on high-interest rates.
Insightful Thoughts by Joe on Credit Improvement
It's quite common for people to face subpar credit score at some point in their lives. However, it's important that you take your status seriously and put in the required effort and time to work on both your finances and credit health. Despite what most people believe, rebuilding one's credit score is definitely possible with the right mindset and approach. Unfortunately, many consumers with a poor credit rating get stuck in a destructive cycle that feels permanent. However, by prioritizing your credit and spending habits, you can make remarkable improvements to your credit score in no time. Start the process by establishing a sound budget and making a conscious effort to reform any bad spending habits that hold you back; these efforts will positively affect your credit rating. If you require guidance and assistance in improving your credit score or need help with credit repair, don't hesitate to contact us at www.asapcreditrepairusa.com.