It's surprising to know that there are thirty various levels of credit scores. Many individuals may not be aware of this fact, which can cause confusion when searching for the best credit score online. It's essential to note that some information may not be accurate, leading you to the wrong path. My name is Joe Mahlow, and I have been involved in the financial literacy and credit repair industry for more than fifteen years. My objective is to provide genuine insights on different topics, such as credit scores. With my vast experience, I was able to assist more than twenty thousand clients in improving their credit scores. In this article, I'll provide you with ample information to do the same. So, let's get started!
Contents:
Different Types of Credit Scores: FICO and Vantage
Understanding Good Credit Scores
What Credit Score Do I Need to Buy a House?
What Credit Score is Needed to Buy a Car?
How to Improve Your Credit Score: Simple Steps
Joe's Perspective on Building Credit
Different Types of Credit Scores: FICO and Vantage
In the world of credit, there are two main models of credit scores: FICO and Vantage. Both models are vital to understanding how your credit score is calculated.
FICO Credit Score
The FICO credit score is the most widely used scoring model with eight different types. Each FICO model considers specific information from your credit report, resulting in different scores. For example, lenders use FICO 5 for mortgages and FICO 8 for credit cards.
The reason for this is that each credit report has a different "weight" or importance placed on specific factors. For instance, a mortgage lender will weigh your previous mortgage history more heavily than other factors when computing your FICO 5 score. Thus, the most significant factor varies depending on the type of loan you are applying for.
You can check your FICO scores by signing up for an account on the myfico.com website.
Vantage Credit Score
The three major credit reporting agencies - Equifax, Experian, and TransUnion - developed the Vantage scoring model to compete with FICO. The Vantage Score is considered a new scoring model compared to FICO, but it is gaining popularity in certain areas, such as personal loans and auto lending.
While the Vantage Score is accurate, it is not widely used for lending purposes. Therefore, it is best used as a general idea of your credit score, rather than a tool to determine your lending ability.
Overall, credit reporting agencies remain essential data collection agencies that play a significant role in providing the best scoring data. While FICO is still the most recognized scoring model, the Vantage Score may become more widely accepted in the next 5-10 years.
Understanding Good Credit Scores
Credit scores are determined using the FICO and Vantage models, with scores ranging from 350 to 850. A score of 850 is the best, while 350 is the worst you can have. Improving your score requires tracking your progress, and there are some essential score thresholds to keep in mind:
1. 620 or below:
This is bad credit. You may have no credit cards or poor credit history, including high-balance credit card accounts. Ten active revolving credit accounts, such as a Credit Builder or OpenSky Credit Card, and timely payments can help you reach the 620 score needed to qualify for an FHA home mortgage.
2. 640-680:
This range means fair to good credit. You have some derogatory marks, high balances, or newly opened accounts, which can temporarily lower your score.
3. 740+:
Any score over 740 is considered "super-prime," offering the best interest rates. If you have attained this score, congratulations! Keep up the excellent work by paying your accounts on time and reducing your revolving credit card balances. Achieving this score puts you in the top 20% of the US population.
What Credit Score Do I Need to Buy a House?
The credit score needed to buy a house is different depending on the type of mortgage loan you want to apply for as per federal regulation and government support. The most commonly used mortgage loan types include conventional loans, FHA loans, and VA loans. Each type of loan has its own unique set of terms and requirements.
1. Conventional Loans
Conventional loans are a popular choice as they have the best interest rates after VA loans. For this type of loan, you are not required to maintain private mortgage insurance (PMI), which increases the downpayment or monthly payment. Typically, conventional loans necessitate a credit score requirement of around 640, and the debt-to-debt ratio should not be higher than 43%.
2. FHA Loans
FHA mortgage loan is typically intended for lower credit scores. You can apply if your credit score is between 580 and 619. However, loan programs from different lenders vary, and you should compare their financial options. The PMI requirement for FHA loans is a minimum of 11 years, which increases the overall mortgage cost. On the other hand, the debt-to-income limit is relatively higher than other loans, up to 50%. Additionally, if you have a lower income, the downpayment requirements on an FHA loan are as low as 3.5% of the purchase. However, it comes with a higher interest rate.
3. VA Loans
The VA loan is a credit score flexible option. Previous defaulted loans and government-owed past-due debts are primarily considered when pre-qualifying. The VA loan often has the lowest available interest rates and doesn't usually require a down payment. To qualify for VA loans, you should have served in the US military for 181 days or more, served 90 consecutive days during wartime, or served 6 years in the National Guard. The military service of your spouse that resulted in their death during active duty may also qualify you. The VA loan is a great option for veterans who deserve a little help from the government.
What Credit Score is Needed to Buy a Car?
When purchasing a car, your credit history is more critical than your credit score, even though a higher score is still important. the interest rate that you qualify for is mainly influenced by your credit history. When seeking a car loan, creditors assess your previous and existing credit history to determine the risk involved. Therefore, individuals with late payments, repossession, and credit issues would most likely experience difficulties getting authorized for a car loan. Though some subprime lenders would approve almost anyone, they impose certain approval criteria, such as higher down payments and increased dealership fees. These additional measures are intended to reduce the risk of you defaulting on the loan. Based on recent data, a good credit score to get approved for a car loan is above 680, and anything lower will result in a higher interest rate. A credit score of 720 or higher results in average interest payments of $5,500, while a credit score of 580 or above results in an interest payment of roughly $15,300 on the same loan amount. Therefore, it is evident that to purchase a car on credit, a down payment or equity investment would come in handy to obtain a beneficial credit score.
How to Improve Your Credit Score: Simple Steps
Building a solid credit score takes time and patience. Rushing the process and making bad choices with your credit can make things worse. Focus on these steps to start raising and managing your credit score:
1. Open 3-5 revolving credit accounts (credit cards) to help boost your credit score.
A secured credit card like Open Sky or Credit Builder Card is perfect for those with limited credit or in need of rebuilding their score. Use these cards on small purchases, like gas or groceries, and be sure to pay them off on time.
2. Request a credit limit increase from your credit card company to lower your credit utilization percentage.
Each company has a different process, but it typically involves filling out information about your income and payment history.
3. Keep your balances low and close to zero.
Only use your credit cards for small purchases, and aim to leave about a $1-5 balance each month. If you have high balances and can't pay them off, make a plan to pay a percentage of your paycheck towards the credit card bill each month.
4. Be patient and stay consistent with your credit habits.
It can take a few months to see changes in your credit score, but with dedication and good habits, you can build a solid credit history.
Joe's Perspective on Building Credit
Having bad credit can be a frustrating experience, but it's essential to take it seriously and work on improving it. If you're willing to dedicate the time and effort to focus on your finances, you'll soon notice significant changes in your credit score. Many people fall into the trap of believing they'll never have excellent credit again, but that couldn't be further from the truth. It requires hard work, commitment, and changing your spending habits, but it's achievable if you prioritize your credit. To begin, create a budget and make a conscious effort to address any problematic spending habits. By doing so, you'll see a direct improvement in your credit score. If you're looking for further guidance or assistance with credit repair, don't hesitate to contact my office at www.asapcreditrepairusa.com.