It may come as a surprise that there are actually 30 different levels of credit scores. Many individuals aren't aware of this when they search for the best credit score on Google. However, it can be overwhelming to sift through the various pieces of information available online, and some of it can be misleading. That's where my expertise comes in. My name is Joe Mahlow, and I've spent over fifteen years in the financial literacy and credit repair field. My aim is to provide straightforward advice on a range of topics, including credit scores. Having successfully helped more than twenty thousand clients improve their credit scores, I'm confident that I can educate you effectively on this important topic. Let's get started.
Contents:
Different Types of Credit Scores
What Constitutes a Good Credit Score?
What Credit Score is Needed to Qualify for Different Mortgage Loans
Determining the Ideal Credit Score to Purchase a Car
Tips to Raise Your Credit Score
Insights by Joe
Different Types of Credit Scores
Understanding the credit scoring system is essential when it comes to managing your finances. The FICO and Vantage score models are the two most commonly used scoring models in the US. Here's what you need to know:
FICO Credit Score
The FICO scoring model is the most popular model among lenders, with several FICO models from FICO 2 to FICO 10 used to calculate your credit score. The type of credit report pulled by lenders depends on the nature of the credit you are applying for. For example, a mortgage lender will generally pull your FICO 5 credit report, while a credit card company will pull your FICO 8 credit report.
Why are there so many FICO scores?
Different FICO models place different weight on various factors impacting your credit score; for instance, your previous mortgage history is more critical in a FICO 5 credit report, while your previous credit card history will significantly affect your FICO 8 score. To get an idea of all your different credit scores, consider signing up for an account on www.myfico.com.
Vantage Credit Score
The three major credit reporting agencies developed the Vantage Score model in competition with FICO. Vantage is a relatively new credit scoring system that credit monitoring websites frequently use to provide free credit reports. While FICO still dominates the lending sector, the Vantage Score model is gaining popularity in sectors like personal loans and auto lending.
Is the Vantage Score accurate?
Yes, it is. However, it is not widely used for lending purposes, so it may not be accurate in that context. Instead, it can provide a good general idea of your credit score. In the future, more lenders will likely use the Vantage Score model since it uses the best available scoring data.
What Constitutes a Good Credit Score?
A good credit score is essential for obtaining the best interest rates and favorable terms when applying for loans. The FICO and Vantage scoring models provide scores that range from 350 to 850, with 850 being the best score and 350 the worst. Here are some critical score thresholds to help you understand where you stand during your credit-building journey:
1. 620 or below
Having a score below 620 is considered bad credit. It indicates adverse credit history, possibly high-balance credit card accounts, or no credit cards at all. To improve your scores, ensure you make timely payments and have ten active revolving credit accounts open. A secured credit card like the Credit Builder Card or OpenSky Credit Card can also help you build your credit score. Once you attain a credit score range of 620, you become eligible for an FHA home mortgage.
2. 640-680
A score within this range is considered fair for good credit. It suggests that you have established credit, but you may have some derogatory marks or accounts on your credit. Paying down your high credit card balances can improve your score. Newly opened accounts could cause a temporary drop in your scores; however, don’t worry, your scores will increase again.
3. 740+
If your credit score is above 740, congratulations! It is considered "super-prime" and puts you in the top 20% of the US population. This score guarantees you the best interest rates for most loans. To maintain such a score, always pay your accounts on time and keep your revolving credit card accounts paid.
What Credit Score is Needed to Qualify for Different Mortgage Loans
Depending on the type of mortgage loan you are interested in, the answer to what credit score is needed to qualify for a home loan may differ from one loan type to another. Housing loan regulations and guidelines are similar, yet subtly different for each of the most common types of home loans: conventional loans, FHA loans and VA loans.
1. Conventional Loans
Conventional loans, being the most popular ones, are generally the most attractive savings options offered to non-military personnel. Borrowers do not have to maintain private mortgage insurance, which can increase the down payment and monthly payments. Conventional loans' down payment requirements are usually reasonable and interest rates are generally better than other housing loans. Borrowers need a typical credit score of 640, while the credit-to-debt ratio should not exceed 43%.
2. FHA Loans
FHA loans cater to lower credit scores typically ranging from 580 to 619. Since different loan programs have unique criteria, borrowers within credit score limits need to look for lenders who can provide them with the best financial options. FHA loans usually require PMI for 11 years, an extra expense for borrowers to consider when purchasing a home. The loan type also typically has a debt-to-income limit worth up to 50%, allowing borrowers with lower income to purchase more houses than with a conventional loan. While down payment requirements are as low as 3.5% for FHA loans, interest rates are generally higher.
3. VA Loans
Technically, there isn't a credit score requirement for a VA loan. However, liabilities or government-owed past due debts need to be checked via pre-qualification. To be eligible for a VA loan, you must have served 181 days in the United States Military, 90 consecutive days during wartime, served 6 years with the National Guard, or lost a spouse to active duty. VA loans typically have the best interest rates and require no down payment. As an audience myself, I find VA loans an excellent way of giving back to our veterans.
Determining the Ideal Credit Score to Purchase a Car
When it comes to buying a car, having a good credit score is important, but your credit history takes precedence over your credit score in determining your eligibility and interest rate. Even though the interest rate is influenced by a higher credit score, credit issues can hurt your chances of acquiring a car loan, and lenders often look at your previous and current credit history to determine the prospect of extending credit.
Some lenders may overlook your poor credit history to approve you for a loan, but you may need to meet specific criteria like a higher down payment and additional dealer fees. Dealerships often charge fees to approve you for the loan due to the risk of defaulting. When you go to a dealer and have bad credit, they may control the vehicle you can buy since they get a higher markup on the car. Finally, having equity or a down payment gives you more leverage when buying a vehicle with credit.
The Credit Score Range Required to Buy a New Car
There is no precise credit score range, but a credit score of over 680 is perfect when buying a car. The risk you pose to the lender can increase the interest rate charged for credit scores below 680.
Here's a breakdown of the interest you might pay depending on your credit score:
- Someone with a credit score of 720 or more will pay approximately $5,500 in interest on a loan.
- Someone having a credit score of 680 or greater will pay, on average, $6,600 in interest on a loan.
- Someone with a credit score of 650 or greater will pay, on average, $8,100 in interest on a loan.
- Someone with a credit score of 615 or higher will pay, on average, $10,200 in interest on a loan.
- Someone with a credit score of 580 or higher will pay, on average, $13,900 in interest on a loan.
- Someone with a credit score of 580 or higher will pay, on average, $15,300 in interest on a loan.
Based on this data, the lower your credit score, the higher the interest rate you'll pay, and it will influence your overall credit score.
Tips to Raise Your Credit Score
Building a good credit score requires patience and effort. Taking the necessary steps can improve your credit score, but it is not an overnight process. Impatience often leads to poor credit decisions, which can worsen your problems. Therefore, you must exercise patience when building your credit score.
Here are some effective tips to improve your credit score:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit is a great option for boosting credit scores. For individuals with limited credit or those trying to rebuild their credit, obtaining a large loan is challenging, and getting approval may be difficult. A secured credit card, such as Open Sky or Credit Builder Card, can be a good starting point for building credit. Revolving credit makes up 30–35% of your overall credit score, making it the best option for quickly improving credit scores. However, it takes 2-4 months to exhibit an increase in credit scores. It is crucial to pay the balance on time and maintain a $5–10 balance each time a payment is made. Use the card for small purchases and limit its use.
2. Raise Your Credit Limits
Requesting a credit limit increase can quickly increase your overall credit limit and lower your credit utilization percentage, provided you have active revolving credit card accounts. High credit card balances exceeding 30% of your overall limits harm credit scores the most. You can avoid this by increasing your credit limits. Different credit card companies have different processes for credit limit increase. Most can be done online or by calling the company. A credit card company usually agrees to increase your limit if you have an excellent payment history for 7–15 months.
3. Pay Down Your Balances
Keeping your balances low and close to zero is critical. You can use your credit cards each month but for small purchases. Leave a $1–5 balance on your credit cards when paying your bill every month. If you cannot afford to pay your high balances, make a game plan to pay down a certain percentage of your balance each month. Avoid running your balance back up after paying off the credit card. Limit your credit card usage, as credit card spending habits play a significant role in your overall credit score.
Insights by Joe
We've all had moments when our credit score was less than perfect. However, if you are committed to improving your credit situation, you can witness remarkable transformations in your credit score in no time. Many people with poor credit remain stuck in a never-ending cycle and find it impossible to rebuild their creditworthiness. Nevertheless, if you devote sufficient time and effort to developing a great credit score, you can definitely achieve positive results. To initiate this process, you need to work on your spending habits, start by following a budget, and do away with bad spending patterns which adversely affect your credit score. This article caters to individuals looking to gain a deeper insight into credit and its operation. If you require guidance on managing your credit score or credit repair services, please contact my office at www.asapcreditrepairusa.com. Here are a few steps you can take to get started: