It might surprise you to learn that there are actually 30 different credit score levels. Despite this fact, searching for information on the best credit score can result in a lot of conflicting data and confusion. Unfortunately, some of this information can even be misleading. My name is Emily Harper, and I've spent the past 15 years working in financial literacy and credit repair. My aim is to provide you with straightforward advice on various topics, such as credit scores. Having helped over 20,000 clients improve their credit scores, I hope to give you all the information you need to do the same. Let's jump right in.
Contents:
Different Credit Score Models and How They Work
Understanding Good Credit Scores
Credit Score Requirements for Different Types of Mortgage Loans
Credit History Plays a Crucial Role in Car Loan Approval
Tips on Improving Credit Score
Insights by Joe
Different Credit Score Models and How They Work
Credit scores play an important role in determining one's financial health, and understanding these scores is crucial in managing one's finances. There are two significant credit scoring models that one should be familiar with. These are the FICO model and the Vantage model. By understanding the differences between these two models and how they calculate credit scores, one can realistically assess their financial status.
FICO Credit Score
The FICO credit scoring model is the most widely used and popular model in the market today. It has eight different models, from FICO 2 to FICO 10, and each model calculates scores differently based on a person's credit report. Each model has a varying weight for the factors that make up one's credit scores. This variation in weight is because each lender has different priorities when assessing creditworthiness. For instance, mortgage lenders usually pull FICO 5 credit reports as it significantly considers one's mortgage payment history. In contrast, credit card companies use FICO 8 reports because it prioritizes one's credit card history. Auto lenders primarily use FICO-2 reports that allocate weight to one's previous auto history. To see your different FICO credit scores based on the type of lender that pulled your credit history, sign up for an account with www.myfico.com.
Vantage Credit Score
The Vantage Score is a new credit scoring model that was developed by Equifax, Experian, and TransUnion to compete with the widely used FICO model. While credit monitoring websites often use Vantage to provide free credit reports, it is not yet commonly used for lending purposes. However, the Vantage Score is gaining popularity in some sectors, such as personal loans and auto lending. Although it is accurate in measuring a person's creditworthiness, it may differ from one's actual lending score since it is still in its infancy stage. Instead, use it to obtain a general idea of your credit score. It should be noted that the FICO scoring model dominates the lending sector, and Vantage's accuracy can vary. However, as credit reporting agencies have the most extensive data collection outside social media, they hold the upper hand in providing the best scoring data.
In conclusion, knowing the different credit scoring models that exist and their weights can significantly help in understanding one's credit scores and overall financial status.
Understanding Good Credit Scores
Credit scores are usually measured between 350 to 850, with 350 being the lowest and 850 being the highest score possible. To achieve the highest score, it's crucial to monitor your progress and consider some significant points as you build your credit history. Below are some crucial thresholds to keep in mind:
620 or below:
This score range is considered poor, and if you fall below it, you may have a history of adverse credit. You can improve your score by paying all your bills on time and having around ten revolving credit accounts open. Secured credit cards such as the Credit Builder Card or OpenSky Credit Card can help you build your credit. Once you achieve a score of 620, you can qualify for an FHA mortgage.
640-680:
This score range is average for good credit; it means you have established credit but may have some negative marks or accounts that are impacting your credit. Paying down your credit card balances and avoiding new account openings will help improve your score.
740+:
Any score over 740 is an indication of "super-prime" credit and will qualify you for the best rates on most loans. If you fall into this range, congratulations! You are part of the 20% of Americans with this score. Maintain your good credit score by paying your bills on time and keeping a low balance on your revolving credit card accounts.
Credit Score Requirements for Different Types of Mortgage Loans
The credit score necessary to buy a house depends on the type of mortgage loan you are aiming for. Generally, most mortgage loans have similar requirements and guidelines due to federal regulation and government backing. The three most common mortgage loan types are conventional loans, FHA loans, and VA loans.
1. Conventional Loans
Conventional loans are the most popular type of loan and are typically the best option after VA loans. They do not require you to maintain private mortgage insurance (PMI), which is an added cost that can increase your downpayment or monthly payment. PMI protects the lender in case you stop making payments on your loan. Conventional loans usually have lower downpayment requirements and better interest rates than the other types of mortgage loans. The typical credit score requirement for a conventional mortgage loan is 640, and the debt-to-debt ratio should be no higher than 43%.
2. FHA Loan
The FHA mortgage loan has a lower credit score requirement, typically ranging between 580 and 619. It's essential to remember that different loan programs have varying requirements. Hence, if you fall within the credit score limits, shop around for lenders who offer the best financial option for you. FHA loans require you to maintain PMI for at least 11 years, which adds to your mortgage's cost and should be considered when budgeting. The debt-to-income limit on an FHA loan is higher, allowing you to purchase a more substantial home with a lower income when compared to conventional loans. Additionally, FHA loans require a low down payment of 3.5%, making them an attractive option to purchase a home with less money out of pocket. However, they typically have a higher interest rate.
3. VA loan
To qualify for a VA loan, you need to have served in the United States Military for at least 181 days, served for 90 consecutive days during wartime, served for six years with the National Guard, or have a spouse who lost their life during active duty. There isn't technically a credit score requirement with the VA Loan, but past defaulted loans and government-owed past-due debts will be assessed when pre-qualifying you. The VA loan has the best interest rates available and doesn't require a down payment. It's an excellent option for veterans to access housing finance, and it's a perfect way to give back to our nation's heroes.
Credit History Plays a Crucial Role in Car Loan Approval
When it comes to purchasing a car, the approval for a car loan majorly depends on your credit history, not just your credit score. Though a credit score is a significant aspect, the interest rate you are eligible for relies more on your credit history. Applying for a car loan with credit issues prompts lenders to assess your past as well as your current credit history to evaluate the risks associated with lending you money. For instance, individuals with a history of late payments, repossession, or other credit issues may find it harder to get their loan approved than those who have a clean credit history. However, bad credit lenders or special finance lenders approve car loans for almost anyone, despite previous repossessions or outstanding payments. But to be approved, buyers need to meet certain criteria such as a higher down payment and additional dealership fees while the dealership pays a fee to reduce the risk of default on a loan. Having equity or a down payment also gives you the upper hand while buying a car on credit.
Ideal Credit Score Range for Buying a New Car
Although there isn't a specific credit score to guarantee eligibility since there are several factors involved, a credit score above 680 is considered ideal. A score below this point may increase the interest rate you ought to pay and comes with a higher risk of default. Here's an example of how credit scores affect the interest rate:
A credit score of 720 or above pays an average interest rate of $5,500 on a loan.
A credit score of 680 or above pays an average interest rate of $6,600 on a loan.
A credit score of 650 or above pays an average interest rate of $8,100 on a loan.
A credit score of 615 or above pays an average interest rate of $10,200 on a loan.
A credit score of 580 or above pays an average interest rate of $13,900 on a loan.
A credit score of below 580 can pay an average interest rate of $15,300 on a loan.
The above data signifies that a higher credit score will lower the amount of interest paid, and thus, impact the credit score favorably.
Tips on Improving Credit Score
Improving your credit score is a process that requires time and patience. Rushing the process can often lead to irrational decisions that can worsen the situation. However, there are steps you can take right now to enhance your credit score, such as:
1. Open 3-5 Revolving Credit Accounts (Credit Cards)
Revolving credit plays a significant role, making up 30-35% of your overall credit score. Opening a secured credit card like Open Sky or Credit Builder Card can provide the best chance of approval and build credit scores quickly. Ensure you pay your balance on time and limit spending to small purchases like gas or groceries.
2. Request Credit Limit Increase
Requesting a credit limit increase can reduce your credit utilization percentage and increase overall credit limits. Each credit card company has its own process, but you can typically fill out some information and call your credit card company to request a credit limit increase.
3. Pay Down Balances
To keep your balance low, use your credit cards for small purchases, and leave about a $1-5 balance on your cards when paying your bill. If you have high balances, create a game plan to pay them down each month. Limit your credit card usage and avoid running the balance back up.
Improving your credit score may take some time, but with these tips, you can start building a better credit score today.
Insights by Joe
Many people have experienced poor credit scores at some point in their lives. However, if you approach this matter with seriousness and put in the necessary time and effort, you will see significant improvements in your credit score in no time. Bad credit can keep consumers stuck in a cycle of financial difficulty, which can be discouraging. Developing and maintaining a great credit score requires effort and dedication, but it is achievable with the right mindset and habits. Begin by creating a reasonable budget plan and identifying and correcting any negative spending patterns. This will have a direct and positive impact on your credit score. The purpose of this article is to be a helpful guide on understanding credit. If you need assistance repairing your credit score, don't hesitate to contact my office at www.asapcreditrepairusa.com.